Ramsay Health Care eyes growth with $1.4bn UK mental health acquisition

Ramsay Health Care (ASX: RHC) is set to acquire UK-based healthcare provider Elysium Healthcare for $1.4bn. 

Elysium is a leading operator of long-term medium and low secure hospitals and care homes for individuals with mental health conditions. The business has a particular focus on acuity care with 72 operational sites and approximately 2,000 beds. 

It is understood that the business revenue base is funded approximately 99% by public system payors such as the National Health Service (NHS) England and other clinical commissioning groups and local authorities. 

Ramsay managing director and CEO Craig McNally views the acquisition as an ‘excellent opportunity’ to expand the company’s existing services in the UK. 

“The acquisition of Elysium will expand Ramsay’s patient pathways into the GBP 15bn UK mental health market at a time when more and more people are seeking support for mental health, learning difficulties and neurological issues,” said McNally. 

The transaction is expected to be complete during the first quarter of FY22.

Strategic rationale 

Ramsay will operate its new acquisition as a complementary business to its existing UK hospital operations. The Group is targeting annual benefits of at least 5m euros per annum from procurement, leveraging systems and network scale. 

Elysium is viewed as an opportunity to enter a growth market with favourable demographics including increasing mental health awareness and improving diagnostics.

The acquisition plays into the UK Government’s commitment to increase funding for mental health services by 2.3bn euros per annum by 2023-24.

From a financial perspective, the acquisition is expected to deliver mid-single digit earnings per share accretion in FY23. 

Fundamentals

Ramsay shares have been caught between two diverging narratives. 

The company's first quarter FY22 trading update flagged that ongoing covid restrictions have weighed on elective surgery bookings and patient volumes, dragging first quarter net profit figures down -39.5% year-on-year.

Taking a more optimistic view, the situation could be seen as building pent-up demand for when restrictions are lifted.

In response to the major first quarter disruptions, McNally said that the business is still "seeing strong underlying demand for health care services across our regions."

The covid overhang has weighed on Ramsay’s share price performance, as it has traded mostly between mid-high $60s since April 2020.

The company paid a (fully franked) dividend yield of 1.80%, and went ex-dividend 6 September 2021.

What brokers think

Consensus price targets sit at $68.88, just a fraction lower than Ramsay's current share price.

Based on Morningstar's fair value of $63.84, the stock looks overvalued.