Sector suffers a health scare on concerns of weak outlook

Private hospital operators Healthscope and Ramsay Health Care continue to be dumped on the Australian market.

Citi reduced its price target on Healthscope from $3.33 to $2.45 and cut its recommendation from “buy” to “neutral”.

Shares in private hospital operators Healthscope and Ramsay Health Care continued to be dumped on the Australian market yesterday on concerns of a weak outlook.

Healthscope, which kicked off the selldown last week after issuing a profit warning on Friday, lost $230 million of its market value yesterday when its shares closed 5.9 per cent lower at $2.24.

Shares in the hospital operator slumped 19 per cent on Friday, while its rival Ramsay fell 6 per cent. The slump on Friday wiped $1.5 billion from their collective valuations.

Ramsay lost another $500m from its value yesterday after its shares closed 4.5 per cent lower at $71.40.

Healthscope boss Robert Cooke last week told shareholders at the company’s annual general meeting it had hit weaker than expected revenue growth at its core hospitals unit in the September quarter. Low volumes through the first quarter forced the company to warn the hospital unit’s operating earnings before interest, tax, depreciation and amortisation were on track to be flat year on year, a sudden drop-off from last year’s growth rate of 8.3 per cent.

Citi analyst Victor Windeyer said Healthscope’s management lacked confidence and visibility on 2017.

“The stated lack of visibility on procedure volume even in the next month is concerning,” he said. “Healthscope maintained that the volatility in volume is being felt industry wide while Ramsay stands by its guidance. In our view, Ramsay’s Australian assets are less susceptible but not immune to short-term fluctuations in local demand.”

Citi reduced its price target on Healthscope from $3.33 to $2.45 and cut its recommendation from “buy” to “neutral”.

Macquarie’s analysts said there were several processes under way in Australian healthcare that had the potential to curb the robust growth of private hospitals, including a list of government reviews linked to the sector and concerns on the affordability of private health insurance.

Analyst Sean Laaman said he had long questioned affordability issues affecting the over-earning of private hospitals.

“We see this (Healthscope update) as a possible sign hospital earnings are not as durable as suggested by such expensive multiples,” he said.

Credit Suisse said in a client note that given private hospital costs represented around 45 per cent of Medibank’s net claims expense, the lack of activity for Healthscope suggested a lack of claims for the Australian-listed private health insurer.

The bank’s analysts said that if the low claims inflation persisted in the second half of 2016, that would mean more than 12 months where claims inflation was well below the 5 to 6 per cent premium rate increases.

“It will now be very hard for the insurers to justify the price increases they have achieved recently,” the bank said.