Share pain persists for hospital operators Healthscope and Ramsay Health Care

Shares in Healthscope and Ramsay Health Care have been hammered again and the sell-off may have a way to run.

Healthscope managing director Robert Cooke. A weak outlook triggered the sell-off.

Australia’s leading private hospital operators Healthscope and Ramsay Health Care are reeling for a second straight session, as analysts readjust expectations following the release of a weak profit outlook from Healthscope on Friday.

The sell-off wasn’t quite as intense on day two, although Healthscope (HSO) had shed 5.88 per cent by the close of today’s session and its peer gave back a further 4.55 per cent.

Such moves have seen the former shed a further $230 million in value, while Ramsay (RHC) has dropped another $500m.

The two companies had $1.5 billion wiped from their collective valuations Friday as a “horrendous” September led Healthscope to warn its core hospitals unit might deliver zero growth this year.

Its shares plunged 19 per cent in response on Friday, while Ramsay slumped 6 per cent as it was caught in the backwash.

Analysts are concerned the market thrashing is not yet over, with Macquarie Capital listing a series of headwinds that could keep them in the crosshairs of shorters in the short- to medium-term.

“(There’s a) real risk this industry pressure is not transient,” the bank’s analysts said.

“As we have highlighted previously, there are a number of processes underway within Australian healthcare that have the potential to curb the previously robust growth of private hospitals, including (i) the MBS Review and its associated scrutiny of doctor activity, (ii) better reporting of intervention rates from government healthcare agencies, (iii) ongoing focus on PHI affordability, and (iv) increasing insurer auditing.”

Macquarie retained a neutral rating, but lowered its target price to $2.36.

“After (Friday’s) 19 per cent selldown, Healthscope is trading at ~21x (on our numbers) which could still be considered expensive for a stock forecast to achieve flat EPS growth in FY17,” the bank’s note read.

First NZ Capital provided a similar review to Macquarie, holding a “neutral” rating and trimming a price target 40c to $2.50 as it warned current issues “may take some time” to resolve.

Analysts at Morgan Stanley also failed to see the hint of any bargain, telling investors to tread warily as it stayed “equal-weight”.

“Despite share price decline we see ongoing risk and prefer to wait on the sidelines,” the investment bank said.

“With disappointing guidance early in the financial year we suspect EPS could worsen still.”

It wasn’t all doom and gloom among analysts, however, with UBS and Ord Minnett comfortable in retaining “buy” and “accumulate” ratings, respectively.

Despite this UBS trimmed its target price 30c to $3 and Ord Minnett slashed its by 65c to $2.75.

“We don’t see fundamental risk to longer term drivers for hospitals,” UBS said.

“Our industry forecast expects greater than 6 per cent 10-yearr forward compound annual growth rate in market value (including non-organic expansion).

“We flag periodic volatility, but against long-term outlook, we view any short-term volatility as transient.”