With earnings momentum coming out of covid,
-Acquisition of UK-based
-Company may be in need of up to
-Sale and leaseback of Australian assets a likely option
Despite some encouraging green shoots emerging for a primary casualty of the coronavirus pandemic,
The decision to acquire
News of Ramsay's offer to acquire 100% of
Due to elective surgery shutdowns and having to open up its resources to public health systems in
But despite the pandemic, Ramsay always had one eye on future growth opportunities which in the last 12 months also saw the company complete a whopping
While the Spire acquisition is the first of those growth opportunities, Ramsay CEO
The company clearly sees a blow out in already lengthy surgery and appointment wait times following the pandemic as a golden opportunity. Ramsay is also expected to continue to expand via other European acquisitions, most recently in
Closer to home, pressure on public health systems generally bodes well for private sector operators like Ramsay. The company is currently witnessing a strong resumption of surgeries in
However, due to uncertainty around future restrictions or lockdowns, Ramsay has not provided specific guidance on the magnitude of the bounce-back in surgeries that analysts are clearly looking for.
Despite limited guidance from management on the speed at which surgeries will bounce back in
Citi also views FY23 as a normal earnings year for the company.
All eyes are on Spire
Meantime,
In late May, Ramsay announced it had bid 240p per share for Spire, at a 24% premium to the last close in an agreed deal. This values the equity of Spire at circa
Citi remains somewhat confused about what the combined strategy for the
On the strength of the Spire bid, the broker has upgraded the stock to Buy from Neutral and has increased its target price to
Citi concludes the Spire acquisition, which will give Ramsay 25% of the
Much of Citi's estimate is based on expected synergy benefits being achieved. Ramsay is forecasting "at least"
Funding issues
It is possible, adds Citi, that by maintaining the credit rating, the company could ultimately reduce its overall cost of debt.
For Ramsay to maintain the current investment grade rating, Citi estimates the company will need to raise around
Post the transaction, based on Citi's forecasts, the company's FY22 FFO adjusted leverage would be closer to 4.5x, while net Debt/EBITDA would increase to 2.6x, which is higher than June-19 levels. The broker notes a capital raising of
Credit Suisse shares concerns the Spire acquisition will stretch Ramsay's leverage above 4.0x FFO adjusted leverage, and outside investment grade range. The broker forecasts FFO adjusted leverage increasing to 4.9x in FY22 from 2.6x in FY21, and remaining above the 4.0x limit in FY23, even after factoring in potential synergies.
Even in a bull case scenario, Credit Suisse still obtains a 4.5x FFO adjusted leverage ratio in FY22.
Group covenants to be unaffected
But while Credit Suisse is concerned about the FFO adjusted debt ratio for the investment grade rating, the broker doesn't see risk to the funding group's debt covenants. To retain some flexibility for future investments, Credit Suisse expects Ramsay to lower its FFO adjusted leverage ratio to at least 3.5x.
Credit Suisse notes it is likely to take months before Ramsay completes its internal strategic/capital management review, which may include sale and leaseback of Australian assets, divestment of
It will then take at least 12 months before the
Ramsay has stated the Spire acquisition would be funded from existing debt facilities. But until the market gains clarity on future capital management, Credit Suisse deems it likely the share price will be pricing in the potential for an equity raising. Credit Suisse thus retains its Neutral rating with a target price of
The broker expects Ramsay to remain on a Rating Watch Negative by Fitch until it comes to the market and outlines the outcome of the capital structure review and its capital management plans.
Having witnessed a number of issuances in 2021, Macquarie suspects a convertible note is another potential capital management initiative Ramsay may consider.
Also, Macquarie agrees a sale and leaseback of Australian property assets would be more favourably received relative to a capital raising. It may also highlight the value of the property portfolio, which the broker believes isn't reflected in the current share price.
Based on Macquarie's assumptions, a sale and leaseback of around
Overall, Macquarie continues to remain positive on the medium-longer term outlook for Ramsay, and retains an Outperform rating, with a target price of
The broker expects uncertainty in relation to the capital position to weigh on the share price in the near-term.
Following Citi's upgrade to Buy,
The consensus target combining all six ex-Morgan Stanley currently stands at
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