When it comes to share prices, the general tendency of the market is to use today’s picture of earnings to characterise the outlook and thus value. There are exceptions, of course. For example, the share price of Bluescope Steel (BSL.ASX) is defying today’s depressed earnings knowing that dips in steel margins are transitory. NEXTDC (NXT.ASX) is another example where the market knows to look beyond today’s earnings and cash flow given a lot more can be expected in coming years as they build more data centres. But most commonly what you see is the market setting a company’s value on what it sees today.
Another tendency of the market is to assess earnings based on their presentation as determined by accounting standards. A stock that we think is being particularly impacted here is Ramsay Healthcare (RHC.ASX). Consider the profit and loss (P&L) statement from RHC’s FY24 financial accounts: it appears as though Ramsay Sante, which operates in France and the Nordics, comprises half of RHC’s revenue and earnings.

Is the above a true representation of what a RHC shareholder is exposed to? No, the picture is distorted for two key reasons:
1) Ramsay only owns 53% of Sante; and
2) A majority of RHC’s debt (and hence interest cost) is within Ramsay Sante and is non-recourse to the RHC Group.
While the matter of partial ownership is relatively straightforward to deal with in one’s analysis (e.g. adjust to proportional earnings, deduct minority interest value from enterprise value), the matter of non-recourse debt is less straightforward. As we know when debt is non-recourse, both the debt and related assets are ring-fenced. This means valuations for non-recourse businesses, such as Ramsay Sante, can be treated separately from the rest of the company.
Given this, there is merit in restating RHC’s earnings by excluding Ramsay Sante and instead treating its value (which, being non-recourse, cannot be negative) as an additional separate component to the overall value of the broader business. Starting with the P&L, the below table shows the dramatic shift in optics from the removal of Ramsay Sante where you can see that Australia is in fact the main business of RHC, and FY24 net profit after tax (NPAT) was ~9% higher than reported (ie Ramsay Sante was loss-making).

Restatement of RHC’s financials shapes the view of value. At a current share price of $42, RHC’s market cap is $9.6 billion (i.e. $42 * 229 million shares on issue). On headline NPAT of $300 million in FY24, this results in a price to earnings (P/E) multiple of 32. But what is RHC’s FY24 P/E excluding Ramsay Sante? As above, FY24 NPAT excluding Ramsay Sante was $327 million. As for market cap, given Ramsay Sante is listed on the Euronext exchange, we can calculate RHC’s shareholding in Ramsay Sante as worth ~$1.1 billion based on spot foreign exchange (FX) – see Appendix for details. Thus, RHC’s market cap excluding Ramsay Sante is $8.5 billion, bringing the FY24 P/E down to 26x. Regardless of whether you think P/E is a useful metric to judge value, the main point is that headlines can differ materially from reality.
We have recently added RHC to our equity portfolios at Clime. Our reasoning is simple. Following a failed international investment strategy and subsequent earnings headwinds onset by COVID, we see conditions changing for the better given:
1) RHC has stopped lobbing capital at offshore markets (an area of disappointment for investors historically); and
2) the all-important Australian business is poised to recover lost earnings as struggling peers reduce capacity and as inflation in pricing and costs moves back into balance.
While earnings recovery may continue to take time, at a price of $42 we think the market is placing too much weight on today’s depressed earnings picture which is being magnified by unhelpful optics in the way RHC must present its accounts. It also seems to be forgotten by the market that KKR bid $88 per share for RHC around two years ago. Although the bid didn’t materialise, we believe it recognised the strategic value of RHC’s competitively advantaged Australian hospital network, which is predominantly freehold-owned and well-positioned to meet on-going demand growth for hospital services in the years ahead.
Appendix