ramsay health care - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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18 December 2013

Asia Pacific/Australia

Equity Research

Healthcare Facilities (Health Care (AU))

Ramsay Health Care

(RHC.AX / RHC AU) STRATEGIC ANALYSIS

Price sensitive ■ RHC is price sensitive: RHC's equity valuation is highly sensitive to the

outcomes of its price negotiations with Australian insurers. Analysis implies that RHC has received a 1.1% CAGR in real pricing from insurers (~3.7% nominal) since FY09. Due to increased pressure on insurer margins from escalating claims inflation, we expect insurers will be more demanding in price negotiations and hence we expect real pricing to grow below the recent historic CAGR – in our view hospital operators will need to be somewhat accommodative in order to keep the industry in equilibrium. Indeed our current valuation of A$41.50 implies a ~0.7% CAGR out to FY20. Scenario analysis indicates that continuation of historical pricing dynamics (i.e., a 1.1% CAGR) would result in RHC's Australian hospitals' ROIC rising from 14.7% (FY13E) to 18.5%, and a DCF valuation of A$46.50, 12% higher than our current A$41.50 DCF. However, if only 0% real pricing CAGR occurs, we estimate Australian hospitals' ROIC would fall to 12.7% (FY20) while DCF would be 22% lower (A$32.20).

■ Consumers are relatively inelastic? The sustainability of the private insurance/hospital system to a large degree depends on consumer price elasticity of demand, which in our view remains relatively inelastic. That said, the recent cover "buy-down" evidenced by several larger insurers suggests consumers are not necessarily willing to incur significant increases in a single year. We believe consumers are however likely to continue to absorb mid-upper single digit premium increases that at least facilitate pass through of positive price increases from insurers to hospital providers. We would argue that the single biggest risk to private insurance levels (and the system in general) is a recession and an associated high level of unemployment.

■ Catalysts: 1H14 result (Feb-14); PHIAC data (Feb-14); insurer reporting.

■ Valuation: RHC trades on 24.7x 12mth forward EPS.

Total return forecast in perspective

Mean^

CS tgt^ Sh Prc

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

12mth Volatility* 52wk Hi-Lo IBES Consensustarget return^

Performance over 1M 3M 12M

Absolute (%) 8.9 13.6 58.8

Relative (%) 14.3 17.3 47.9

Financial and valuation metrics

Year 06/13A 06/14E 06/15E 06/16E

Revenue (A$mn) 4,174.5 4,776.0 5,205.0 5,564.7

EBITDA (A$mn) 627.7 724.4 812.0 864.2

EBIT (A$mn) 485.2 557.3 633.7 679.6

Net income (A$mn) 275.4 319.2 366.1 399.2

EPS (CS adj.) (Ac) 148.01 168.39 192.00 199.54

Change from previous EPS (%) n.a. — — —

Consensus EPS (Ac) n.a. 157.60 180.50 202.20

EPS growth (%) 23.0 13.8 14.0 3.9

P/E (x) 28.1 24.7 21.7 20.9

Dividend (Ac) 70.50 81.67 93.10 102.08

Dividend yield (%) 1.7 2.0 2.2 2.5

P/B (x) 6.5 5.8 5.1 4.5

Net debt/equity (%) 64.1 61.2 50.0 37.2

Relative performance versus S&P ASX 200.See Reference

Appendix for a description of the chart. Source: Credit Suisse

estimates, * Consensus, mean range from Thomson Reuters

Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against

ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency

Rating NEUTRAL*

Price (18 Dec 13, A$) 41.61

Target price (A$) 41.50¹

Market cap. (A$mn) 8,408.60

Yr avg. mthly trading (A$mn) 305

Last month's trading (A$mn) 348

Projected return:

Capital gain (%) -0.26

Dividend yield (net %) 2.1

Total return (%) 1.8

52-week price range 41.7 - 26.2

* Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Saul Hadassin

61 2 8205 4679

[email protected]

William Dunlop, CFA

61 2 8205 4405

[email protected]

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 2

Figure 1: Financial summary

Ramsay Health Care (RHC) Year ending 30 Jun In AUDmn, unless otherwise stated2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

Share Price: A$41.61 Earnings 06/12A 06/13A 06/14E 06/15E 06/16ERating c_EPS_SHARESEquiv. FPO (period avg.) mn 202.4 202.6 204.1 204.1 204.1

Target Price A$ 41.50 c_EPS*100EPS (Normalised) c 120.3 148.0 168.4 192.0 199.5

vs Share price % -0.26 EPS_GROWTH*100EPS Growth % 23.0 13.8 14.0 3.9

DCF A$ 41.50 c_EBITDA_MARGIN*100EBITDA Margin % 14.7 15.0 15.2 15.6 15.5

c_DPS*100DPS c 60.0 70.5 81.7 93.1 102.1

c_PAYOUT*100Payout % 49.9 47.6 48.5 48.5 51.2

FRANKING*100Franking % 100.0 100.0 100.0 100.0 100.0

c_FCF_PS*100Free CFPS c 174.7 170.5 210.5 214.7 231.0

Profit & Loss 06/12A 06/13A 06/14E 06/15E 06/16E c_TAX_RATE*100Effective tax rate % 30.3 30.1 30.2 30.1 30.1

Sales revenue 3,956.5 4,174.5 4,776.0 5,205.0 5,564.7 ValuationEBITDA 583.5 627.7 724.4 812.0 864.2 c_PE P/E x 34.6 28.1 24.7 21.7 20.9

Depr. & Amort. (144.7) (142.4) (167.1) (178.4) (184.7) c_EBIT_MULTIPLE_CURREV/EBIT x 21.2 19.4 17.0 14.8 13.6

EBIT 438.8 485.2 557.3 633.7 679.6 c_EBITDA_MULTIPLE_CUEV/EBITDA x 15.9 15.0 13.1 11.6 10.7

Associates 0.0 0.0 0.0 0.0 0.0 c_DIV_YIELD*100Dividend Yield % 1.4 1.7 2.0 2.2 2.5

Net interest Exp. (72.9) (65.4) (70.7) (73.7) (71.4) c_FCF_YIELD*100FCF Yield % 4.2 4.1 5.1 5.2 5.6

Other 0.0 0.0 0.0 0.0 0.0 c_PB Price to Book x 7.3 6.5 5.8 5.1 4.5

Profit before tax 365.9 419.8 486.6 560.0 608.2 ReturnsIncome tax (110.9) (126.3) (147.0) (168.7) (183.1) c_ROE*100Return on Equity % 20.2 21.3 21.6 21.8 21.0

Profit after tax 255.0 293.5 339.6 391.3 425.1 c_I_NPAT/c_I_SALES*100Profit Margin % 5.9 6.6 6.7 7.0 7.2

Minorities (2.3) (2.6) (6.0) (10.8) (11.5) c_I_SALES/c_B_TOT_ASSAsset Turnover x 1.1 1.0 1.1 1.1 1.1

Preferred dividends 17.7 15.5 14.4 14.4 14.4 c_ASSETS/c_EQ_COMMONEquity Multiplier x 3.1 3.1 3.0 2.8 2.6

Associates & Other (35.4) (31.0) (28.8) (28.8) (28.8) c_ROA*100Return on Assets % 6.6 6.8 7.2 7.8 8.1

Normalised NPAT 235.0 275.4 319.2 366.1 399.2 c_ROIC*100Return on Invested Cap. % 13.3 13.4 13.9 15.2 15.9

Unusual item after tax (8.5) (24.5) (24.5) (25.8) (8.1) GearingReported NPAT 226.5 250.9 294.8 340.4 391.2 c_GEARING*100Net Debt to Net debt + Equity % 38.9 39.1 38.0 33.3 27.1

c_NET_DEBT/c_I_EBITDANet Debt to EBITDA x 1.5 1.6 1.5 1.2 0.9

Balance Sheet 06/12A 06/13A 06/14E 06/15E 06/16E c_I_EBITDA/ c_I_NET_INTERESTInt Cover (EBITDA/Net Int.) x 8.0 9.6 10.2 11.0 12.1

Cash & equivalents 173.4 272.3 281.3 368.0 532.2 c_I_EBIT/ c_I_NET_INTERESTInt Cover (EBIT/Net Int.) x 6.0 7.4 7.9 8.6 9.5

Inventories 105.0 112.6 126.8 135.6 143.5 (c_C_CAPEX/c_I_SALES)*-100Capex to Sales % 5.6 6.4 6.2 5.1 4.1

Receivables 422.2 482.8 525.0 563.4 596.6 (c_C_CAPEX/c_I_DEPR)*-100Capex to Depreciation % 164.0 191.8 180.4 149.3 125.4

Other current assets 48.6 112.7 112.7 112.7 112.7

Current assets 749.2 980.4 1,045.8 1,179.7 1,385.0 MSCI IVA (ESG) Rating AProperty, plant & equip. 1,846.5 1,970.1 2,133.1 2,220.2 2,266.6 TP ESG Risk (%): -1

Intangibles 870.6 985.3 1,119.4 1,157.7 1,176.0

Other non-current assets 119.6 126.6 126.6 126.6 126.6

Non-current assets 2,836.7 3,082.0 3,379.1 3,504.5 3,569.3

Total assets 3,585.9 4,062.4 4,424.9 4,684.2 4,954.3

Payables 430.8 470.6 523.3 559.5 592.0

Interest bearing debt 1,069.1 1,260.8 1,340.8 1,340.8 1,340.8

Other liabilities 679.9 789.2 829.7 838.3 845.7 MSCI IVA Risk: Neutral

Total liabilities 2,179.7 2,520.6 2,693.7 2,738.6 2,778.5

Net assets 1,406.2 1,541.8 1,731.2 1,945.6 2,175.8

Ordinary equity 1,161.8 1,291.7 1,475.1 1,678.7 1,897.4

Minority interests -7.8 -2.1 4.0 14.7 26.2

Preferred capital 0.0 0.0 0.0 0.0 0.0

Total shareholder funds 1,406.2 1,541.8 1,731.2 1,945.6 2,175.8

Net debt 895.6 988.5 1,059.5 972.8 808.6 Source: MSCI ESG Research

Cashflow 06/12A 06/13A 06/14E 06/15E 06/16E Share Price Performance

EBIT 438.8 485.2 557.3 633.7 679.6

Net interest -103.8 -70.5 -76.1 -79.1 -79.1

Depr & Amort 144.7 142.4 167.1 178.4 184.7

Tax paid -91.2 -121.1 -106.5 -160.1 -175.6

Working capital 18.8 -28.4 -3.8 -10.9 -8.6

Other 26.6 42.7 0.0 0.0 0.0

Operating cashflow 433.9 450.4 538.1 561.9 600.8

Capex -222.2 -265.6 -298.4 -263.8 -229.4

Capex - expansionary -142.0 -160.6 -190.0 -140.0 -100.0

Capex - maintenance -80.2 -105.0 -108.4 -123.8 -129.4

Acquisitions & Invest 38.1 -91.1 -165.7 -40.0 -20.0

Asset sale proceeds 0.0 0.0 0.0 0.0 0.0

Other 4.6 15.3 5.4 5.4 7.8

Investing cashflow -179.4 -341.4 -458.8 -298.4 -241.7

Dividends paid -128.4 -143.4 -150.3 -176.9 -194.9

Equity raised -9.6 -32.3 0.0 0.0 0.0

Net borrowings -160.7 157.2 80.0 0.0 0.0

Other -5.3 0.0 0.0 0.0 0.0 1 Month 3 Month 12 Month

Financing cashflow -304.1 -18.4 -70.3 -176.9 -194.9 Absolute 8.9% 13.6% 58.8%

Total cashflow -49.7 90.6 9.0 86.7 164.3 Relative 14.3% 17.3% 47.9%

Adjustments -3.4 8.2 0.0 0.0 0.0

Net change in cash -53.1 98.8 9.0 86.7 164.3 Source: Reuters 52 week trading range: 26.39-41.66

MSCI IVA Risk Comment: A' rating. Long history of good

governance, high quality service offering. There is some risk RHC

could come under scrutiny in the UK for incentives to surgeons,

and to a lesser extent perhaps in Australia - this is a matter of

judgement though. Nothing would cause us to think a controversy /

adverse event may arise at the moment though - anything adverse

would likely be politically motivated given we understand RHC has

been operating in its current form for years.

12/18/2013 12:37

Ramsay Health Care Ltd owns & operates private hospitals. It principally operates in Australia,

Indonesia, France & the UK & caters to a range of health care needs from day surgery

procedures to highly complex surgery, & psychiatric care & rehabilitation.

Credit Suisse View

TP Risk Comment: RHC has an impeccable social and

governance reputation and robust corporate governance policies.

Further, its business has a limited environmental impact. As such

we value the ESG risk to our target price at a minimal level. Our

ESG risk is calculated by adding a small risk premium to our DCF

discount rate.

NEUTRAL

24.60

26.60

28.60

30.60

32.60

34.60

36.60

38.60

40.60

42.60

6/12/2012 6/02/2013 6/04/2013 6/06/2013 6/08/2013 6/10/2013 6/12/2013

RHC.AX XJO

1.8

2.8

3.8

4.8

5.8

6.8

7.8

8.8

9.8

Environment Social Governance

Stock Local Sector

Country Global Sector

Source: Company data, Credit Suisse estimates

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 3

Table of contents Price sensitive 4 RHC's recent ROIC history 5

Australian hospitals ROIC growth 5 International investments have held ROIC down 6

Can Australian ROIC growth continue? 7 Volume - operating theatre-driven 7 Price – RHC has demonstrated leverage with insurers 8 Costs – savings have led to subdued growth 10 Invested capital – operating theatres are a guide 11

Forecasting ROIC 14 Organic volume growth of 2.0% 14 Organic pricing growth of 0.2% via ageing mix shift 15 Organic costs - growth assumes flat EBIT margin 16 Brownfields - estimate ROIC of 15% after 3 years 16 Implied future ROIC 17

Scenarios and sensitivity 18 Appendix 21

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 4

Price sensitive RHC's equity valuation is highly sensitive to the outcomes of its price negotiations with

Australian insurers (Figure 2). Using a bottom-up analysis of key variables we estimate

that only a 0.1% change in the 10-year CAGR of the real pricing RHC receives from

insurers equates to a 3.1% differential in RHC valuation.

Indeed RHC's ability to extract an estimated 1.1% real pricing CAGR (3.7% nominal) from

funders since FY09 has been a key determinant of its rising Australian hospital ROIC. Due

to increased pressure on insurer margins from escalating claims inflation (as evidenced by

the recent difficulties between Medibank Private and RHC in finalising contracted pricing),

we expect insurers will be more demanding in price negotiations and hence we expect real

pricing to grow below the recent historical CAGR - our current valuation of A$41.50 implies

a ~0.7% CAGR out to FY20. In our view hospital operators will need to be somewhat

accommodative in order to keep the industry in equilibrium.

Scenario analysis indicates that a continuation of historical pricing dynamics (i.e. a 1.1%

CAGR) would result in RHC's Australian hospitals' ROIC rising from 14.7% (FY13E) to

18.5%, and a DCF valuation of A$46.50, 12% higher than our current A$41.50 DCF.

However in a scenario where RHC achieves only a 0% real pricing CAGR, we estimate

Australian hospitals' ROIC would fall to 12.7% (FY20) while DCF would be 22% lower

(A$32.20).

Figure 2: Historical ROIC and forecast ROIC under various price CAGR scenarios

12.0%

13.1%

13.7%

14.1%

14.7%

15.5%

16.2%

16.7%

17.2%

17.7%

18.2%

18.6%

15.1%15.3% 15.4% 15.4% 15.5% 15.6% 15.6%

14.6%14.4%

14.0%

13.7%

13.3%

13.0%

12.7%

15.3%

15.7%15.9%

16.1%16.4%

16.6%

16.8%

12%

13%

14%

15%

16%

17%

18%

19%

FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Au

stra

lia

RO

IC

Scenario 1: 1.1% real pricing growth Scenario 2: 0.5% real pricing growth

Scenario 3: 0.0% real pricing growth Current CS: 0.7% real pricing growth

Forecast ->


18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 5

RHC's recent ROIC history Australian hospitals ROIC growth

We estimate that the ROIC1

of RHC's Australian hospitals business2

has steadily

increased since FY09, from 12.0% to 14.7% as of FY13 (see Figure 3).

Figure 3: Historical ROIC of RHC's Australian hospitals business

12.0%

13.1%

13.7%

14.1%

14.7%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

FY09 FY10 FY11 FY12 FY13

Australian hospitals ROIC Source: Company data, Credit Suisse estimates

In our view Australian ROIC has risen due to:

■ Sustained price increases from insurers;

■ Cost reduction programs including procurement savings (direct sourcing of

consumables/capital items) and nursing mix management (i.e. proportion of

Registered Nurses to Enrolled Nurses); and

■ Brownfield developments, which management note contribute ~15% ROIC 3 years

after opening (at the latest).

To derive Australian hospitals' ROIC we have calculated:

1) Historical Australian EBIT by deducting estimated Indonesian EBIT and estimated

corporate costs from reported Australasian figures; and

2) Historical invested capital for Australia by deducting assets acquired in France

and the UK from total assets, as reported in RHC's financial statements since

2009.

1 ROIC is defined as EBIT / (working capital + gross fixed assets + gross intangibles)

2 Australia ex. corporate/head office costs

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 6

International investments have held ROIC down

We have determined the ROIC of RHC's UK and France investments by deducting the

Australian ROIC from RHC's total ROIC (we ignore Indonesia given its immateriality prior

to the Sime Darby deal struck at the end of the last period, FY13).

The difference in returns between the Australian and European businesses is stark, as

illustrated in Figure 4: ROIC of the RHC group (ex-corporate costs) has steadily risen from

11.2% to 12.9% (FY09 to FY13) solely due to an increase in the Australian business,

while the ROIC of RHC's European investments has remained flat at ~7.5%,

fluctuating between 6.3% and 8.3%.

Figure 4: ROIC of RHC vs. Australian and International businesses

12.0%

13.1%13.7%

14.1%14.7%

11.2% 11.4%

12.4% 12.6% 12.9%

7.5%

6.3%

8.3%

7.3% 7.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY09 FY10 FY11 FY12 FY13Australian hospitals ROIC Group hospital ROIC International hospitals ROIC

Source: Company data, Credit Suisse estimates. Note Group hospital ROIC excludes corporate/head office

costs

With UK dynamics impacted by only slow recovery in self-pay/PMI work and France

challenged as government austerity measures filter through to hospital funding, we do not

expect ROIC in either region to noticeably improve. As such we turn our attention to the

potential for the Australian business (which contributed ~78% of Group EBIT) to continue

generating ROIC growth.

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 7

Can Australian ROIC growth continue? Using history as a guide

To answer this question we first identify the broad drivers behind recent growth in ROIC.

To break ROIC drivers down to a manageable analytical level, we look at:

■ volume;

■ price;

■ costs (more specifically the price of costs); and

■ capex / brownfields

Volume - operating theatre-driven

Volume is largely driven by the number of operating theatres in a private hospital.

Theatres are the key revenue centres in a hospital as surgical patients, which we estimate

comprise 60-65% of all RHC hospital admissions, are treated in one.

To use operating theatres as a measure of volume we must also assume that:

■ operating theatre utilisation has been constant over the historical period – we assume

they have been close to, if not fully utilised, given the rising demand in hospital

utilisation noted by insurers and a steady increase in the rate of private health

membership in Australia (from 44% in FY09 to 47% in FY13). There are likely to be a

few regional hospitals that remain less than fully utilised, but under-utilised hospitals

are in our view immaterial to RHC's total Australian hospital operations.

■ beds for medical patients (general medical, psych and rehab) have grown in line with

operating theatre additions. While surgical patients represent the majority of RHC's

Australian admissions, we estimate that medical patients are ~35-40% of the total. As

theatres are not a volume measure for these patients, this assumption is critical –

based on review of recent brownfields developments we have no reason to believe

that medical patient admissions haven't consistently grown with theatres.

Theatre additions

We estimate that RHC had ~220 theatres at the end of FY09 and 255 at the end of FY133,

implying a CAGR of 4%. We have assumed linear growth in theatre numbers over this

period to derive theatres per annum over time (we believe theatre additions trended in a

linear manner but were not absolutely linear) – see Figure 5.

Figure 5: Australian operating theatre numbers and CAGR


Australian theatre numbers 220 227 236 245 255

CAGR FY09 - FY13 4%


Using these metrics, volume in RHC's Australian hospitals has grown 4% per

annum since FY09. As a cross-check, private hospital episodes growth in Australia from

the end of FY09 to the end of FY13 was 3.6%4. Our estimate of 4% volume growth based

on operating theatre growth therefore seems reasonable.

3 Analysis of RHC public disclosures on operating theatres over the last ~5 years, and CS estimates

4 PHIAC

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 8

Price – RHC has demonstrated leverage with

insurers

As we have estimated volume growth we can solve price, or, the increase in fees from

insurers (which account for ~75% of total Australian revenues5) realised by RHC since

FY09.

Figure 6 shows our calculation of price increases that RHC has received. Australian

revenues CAGR was 7.7% over the period while volume under our operating theatre

calculations was 4.0% CAGR, implying price CAGR of RHC's funding was 3.7%.

Figure 6: Australian price CAGR calculations

FY09 FY13 CAGR

Australian revenues (A$mn unless stated) 2469.0 3325.7 7.7%

Australian volume CAGR (see Figure 5) 4.0%

Implied Australian price CAGR 3.7%

CPI/inflation CAGR 2.6%

Real Australian price CAGR 1.1%


Inflation over the period was 2.6%, meaning that RHC achieved real pricing CAGR of

1.1% over the FY09–FY13 period. The achievement of real pricing growth cannot be

explained by an ageing population. Indeed, as we demonstrate below, real pricing growth

due to ageing is only expected to be 0.2% per year to 2020 (as older people require higher

cost treatment per episode, the average price per episode grows with ageing). A similar

ageing shift of the population occurred between FY09 and FY13 and hence only a small

proportion of the 1.1% real pricing increase identified can be attributed to ageing.

In our view, the increase in real pricing can be somewhat attributed to RHC

leveraging its high market share, high-quality, large-scale facilities, strong doctor

relationships and blue-chip hospital locations (i.e. North Shore Private,

Greenslopes, Hollywood) to gain real pricing growth from insurers.

That said Figure 7 and Figure 8 demonstrate that market concentration in both the private

insurance and private hospital markets in Australia is relatively even. RHC, while being the

dominant private hospital operator, has a similar market share (30%) to the largest

insurers Medibank Private (27%) and BUPA (26%).

So while the quality of RHC's offering has in our view afforded it bargaining power, if the

insurance industry continues to consolidate then the real pricing growth experienced

between FY09-FY13 may not continue.

5 Credit Suisse estimate. The remaining funding is received from State Governments for PPP hospitals and

the Department of Veterans' Affairs

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 9

Figure 7: Private health insurer market share based on

revenue (FY12)

Figure 8: Private hospital market share based on

revenues (FY12)

Medibank, 27%

BUPA, 26%HCF, 11%

HBF, 7%

nib, 7%

Australian Unity, 3%

AHM, 2.4%

Teachers Federation Health, 2%

Defence Health, 2% GMHBA, 2%

CBHS Health Fund, 1% Westfund, 0.7%

Latrobe Health, 0.6%

Health Partners, 0.6%Queensland Teachers,

0.5% Other, 9%

RHC30%

Healthscope15%

St. John of God8%

Mater3%

Healthe Care3%

Other41%

Source: PHIAC, Credit Suisse estimates Source: Company data, AIHW, Credit Suisse estimates

Other reasons for real pricing growth which we considered but found either

immaterial or largely unsubstantiated are:

■ Increase in services / revenue streams generated per episode: services offered

have not materially changed – the business still receives the vast majority of revenues

for operating theatre episodes/use and/or bed accommodation.

■ Coverage of excess cost inflation: while this is undoubtedly a negotiation point used

by RHC (and other hospital operators) to justify price increases, insurers know that

RHC is able to generate efficiencies of scale and on-going cost savings through pro-

active management. As such, while the basis of annual price negotiations is to cover

inevitable annual increases in the cost of health provision, costs are merely a

reference point in negotiations and not the sole determinant of negotiation outcomes.

■ Acuity of procedures and day/night episode mix: the mix of less complex, lower

revenue day episodes has increased as a proportion of total episodes since FY09 in

the Australian private hospital sector – see Figure 9. As RHC represents such a large

proportion of the private hospital market we believe RHC's episodic mix suggests

downward pressure on absolute pricing rather than upward pressure / real price

growth.

As such, the actual price per specific procedure funded by insurers could be actually

higher than that implied by RHC's reported revenues; RHC has just been receiving a

lower total price because of the proportional growth of lower revenue day cases.

Therefore price increases RHC receives per episode may need to be higher in the

future if the day/night mix remains at current levels, as there is no dilutive effect from

lower revenue day-cases.

That said, the proportion of day/night cases in our timeframe of FY09 to FY13 has only

risen from 57% to 60% over 5 years, which in our view is not large enough to affect

our analysis. A change in day-procedure mix growth over our forecast period could

change the analysis. However a change would only affect valuation and ROIC if there

was a margin differential to RHC between a day case and an overnight case.

18 December 2013

Ramsay Health Care

(RHC.AX / RHC AU) 10

Figure 9: Day cases as a % of total private hospital episodes

54%

56%

58%

60%

62%Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Day episodes as a % of total episodes


Costs – savings have led to subdued growth

As set out in Figure 10, RHC's operating cost base had a 6.9% CAGR since FY09.

Adjusted for CPI inflation and volume (as measured by operating theatres) cost-price

CAGR for RHC was 0.3% over the FY09-FY13 period, well below the real revenue price

increase CAGR of 1.1% (Figure 6).

We note that the 0.3% growth is not reflective of the underlying cost-price of each

item/service that RHC pays for; it also includes the benefits of scale (i.e. brownfield

expansion at existing facilities) as well as efficiencies and cost saving programs that RHC

has implemented that have reduced cost growth over the period.

Figure 10: Australia costs CAGR FY09 – FY13


Australia costs -2165 -2325 -2520 -2683 -2832

Growth % 7.4% 8.4% 6.4% 5.6%

Cost CAGR 6.9%

Volume growth 4.0%

Cost-price CAGR 2.9%

CPI CAGR 2.6%

Real cost-price CAGR 0.3%


Indeed, EBIT margin % expansion has been significant in recent years (particularly

FY12/13) – see Figure 11 ‒ as a result of, in our view, RHC's pricing power with insurers

as well as brownfield returns, tight cost control and savings initiatives.

18 December 2013

Ramsay Health Care


Figure 11: Australia hospitals' EBIT margin % vs. revenue and cost CAGR

12.3%12.6%

13.0%

14.0%

14.8%

7.7%

8.9%

7.7%

6.6%7.4%

8.4%

6.4%

5.6%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


Australia EBIT margin % Australia revenue growth % Australia cost growth %


Will subdued cost growth continue? – RHC does not disclose quantification of cost

savings programs, however we understand that procurement centralisation, direct

outsourcing and nursing mix management have been the key drivers of cost reduction in

recent years. We anticipate that these programs and savings will continue in the near-mid-

term, however we presume that marginal cost reduction will become harder to find over

time.

Invested capital – operating theatres are a guide

Growth capex: We estimate that an operating theatre has cost ~A$15.1mn to build

between FY09 and FY13. The figure includes all ancillary facilities to support the theatre

such as beds/wards, car parking, consultant suites and is based on the average cost of

brownfields over the last 4 years for which operating theatre expansion numbers were

disclosed (Figure 12). As an aside, we estimate the cost of just an operating theatre to be

closer to A$5-6mn.

18 December 2013

Ramsay Health Care


Figure 12: Calculation of brownfields costs – average cost of operating theatre

Hospital State Details of brownfield development disclosed Development cost

A$

Cost per operating

theatre A$mn

Westmead NSW 4 OTs, +15 beds, +2 ICU beds 25-30mn 7.5

St George NSW 1 additional OT, +44 beds and consulting suites for specialists. Total

270 beds, >60 specialist consulting suites.

15-20mn 20

North Shore NSW 57 additional beds, 5 OTs, extra consulting suites, day surgery. 55mn 11

Pindarra QLD Construction of 50 inpatient beds, development of 4 OTs, construction

of consulting suite building and multi-storey car park

55mn 13.75

Hollywood WA Additional 90 beds, 4 OTs, Consulting Suites, Carparking, Day Surgery 128mn gross 88mn

net

32

Joondalup WA Agreement with WA Gov for public and private redevelopment: 85mn includes

private hospital +

shared services

27.6

Greenslopes QLD 58 beds; 4 OTs, obstetrics unit 47mn 11.75

Ipswich QLD 1 OT + day surgery 8mn 8

Sunshine Coast QLD 200 beds; 8 Ots, day centre, day chemo, ICU 150mn 18.8

Cairns QLD New OT 5.9mn 5.9

Warringal VIC 62 new beds, 5 OTs 56mn 11.2

The Avenue VIC OT; day surgery 14mn 14

Average 15.1


Cross-check: Using theatre additions as per Figure 5 (and assuming a linear growth trend

as RHC has not disclosed theatre additions each year) 9-10 theatres were added each

year between FY09 and FY13 – refer Figure 13. We have cross-checked this against the

number of theatres implied by brownfields capex (A$mn) disclosed by RHC for brownfields

projects over the period. Assuming A$15.1mn per operating theatre (as derived in Figure

13 above), we estimate that 8-11 new theatres were built each year over the period. As

such it seems that the A$15mn per theatre is a reasonably accurate measurement of

capex over recent times.

Figure 13: Cross-check of new theatres data vs. new theatres implied by brownfields

capex spend


Australian theatre numbers No. 218 227 236 245 255

New theatres (linear growth) No. 9 9 9 10

Historical RHC disclosure/CS estimates of Australian

Brownfield capex

A$mn 120 131 132 158

New theatres implied by capex spend No. 8 9 9 11


Maintenance capex – our estimates of Australian hospitals' maintenance capex from

FY09-FY13 use the following information:

■ Management note that maintenance capex is ~70% of depreciation, with the shortfall

to depreciation due to additional brownfield developments at the same sites where

maintenance capex is deployed.

■ RHC discloses D&A for its Australian operations (ignoring Indonesia due to

immateriality) in its financial accounts.

We estimate Australian maintenance capex over the FY09-FY13 period rose from A$52mn

in FY09 to A$75mn in FY13 (Figure 14).

There is no evidence to suggest that the historical relationship between D&A and invested

capital will diverge in the future so long as RHC maintains a similar brownfields investment

pace (which we expect it will).

18 December 2013

Ramsay Health Care


Figure 14: Maintenance capex as % of D&A


Australian D&A 74 89.9 98.8 106.9 107.4

Australia invested capital, less D&A 2405.6 2396.8 2634.1 2996.4 3227.7

D&A as % of invested capital -3.1% -3.7% -3.8% -3.6% -3.2%

Maintenance capex as % of D&A 70% 70% 70% 70% 70%

Estimated maintenance capex 52 63 69 75 75


Maintenance capex has been steady between (2 and 2.5% of Australian revenues) since

FY09, while growth/brownfield capex has been ~4-5% - see Figure 15.

We note that total capex as a % of sales of 6-7% over the FY09-FY13 period has

supported volume CAGR of 4.0%. In forecasting capex we use these metrics as a cross-

check.

Figure 15: Maintenance and growth capex as % of Australian revenues

2.1%

2.4% 2.4% 2.4%2.3%

3.4%

4.5% 4.5%

4.2%

4.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0

50

100

150

200

250


A$

mn

cap

ex

Australia growth capex Australia maintenance capex

Maintenance capex as % of revenues Growth capex as % of revenues Source: Company data, Credit Suisse estimates

18 December 2013

Ramsay Health Care


Forecasting ROIC With the background and quantification of the drivers of RHC's recent rise in ROIC

established we turn to forecasting ROIC over the forecast period.

Our forecast is for organic growth in RHC's Australian hospitals business; that is,

revenues, costs and capex to service underlying growth in private hospital demand in

Australia. In determining organic growth we have made the following assumptions.

■ The % of the Australian population covered by private insurance remains 47.0%;

■ RHC's market share remains constant (i.e. new brownfield developments service only

organic volume growth, not market share gains);

■ Current hospital utilisation of different age groups remains consistent;

■ Funding weightings for different procedure types used by insurers are unchanged.

A change in the above assumptions would clearly lead to different outcomes. However, we

believe that the relationships between revenues, costs and investment capex would still

broadly hold. The magnitude of growth in all areas however would differ with a change in

the above assumptions. Our forecasts are for the period from FY14F to FY20F.

Organic volume growth of 2.0%

Using ABS and PHIAC data we estimate that RHC's organic Australian volume/procedure

growth will be 2.0% per year to 2020. The estimate is based on:

■ A CAGR of 1.2% in the Australian population as estimated from ABS Australian

population forecasts to 20206; and

■ A CAGR of 0.8% in volume growth due to a natural shift in the Australian population to

older patients that have a higher hospital utilisation rate than younger patients. The

CAGR estimate is based on current PHIAC hospital utilisation by age data overlaid

with the expected shift in ageing as forecast by the ABS (Figure 16, Figure 17). The

ageing impact is most clearly seen in Figure 18 which shows projected total private

hospital episodes in 2020 at the 2013 population level.

Figure 16: Australia's population expected to continue to

age…

Figure 17: …which increases the market for private health

insurance as older Australians are more likely to utilise

private insurance

0%

2%

4%

6%

8%

10%

12%

14%

16%

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

% o

f p

op

ula

tio

n

2010 2020

Ageing population

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

0%

2%

4%

6%

8%

10%

12%

14%

16%

0–4

5–9

10–1

4

15–1

9

20–2

4

25–2

9

30–3

4

35–3

9

40–4

4

45–4

9

50–5

4

55–5

9

60–6

4

65–6

9

70–7

4

75–7

9

80–8

4

85

+

Number of insured people Annual private hospital episodes as % of population

Source: ABS, Credit Suisse estimates Source: ABS, PHIAC, Credit Suisse estimates

6 Using ABS's mid-case immigration forecast

18 December 2013

Ramsay Health Care


Figure 18: Projected private hospital episodes by age group 2013 and 2020 (with

population growth held constant)

0

20

40

60

80

100

120

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+

tho

usa

nd

s o

f p

riva

te h

osp

ital

ep

iso

de

s

2013 2020

Source: ABS, PHIAC, Credit Suisse estimates

Organic pricing growth of 0.2% via ageing mix shift

With organic volume growth of 2.0% forecast under the above assumptions, our analysis

suggests that organic revenue growth will be even higher at 2.2% due to a 0.2% natural

pricing increase due to the ageing population. The higher revenue growth rate factors the

ongoing ageing effect of pricing, whereby older private hospital patients are admitted for

episodes of higher acuity and price.

Annual fees earned by hospital operators per private episode (excluding Medicare

funding), by age, is shown in Figure 19. The average fee increases from ~A$2,600 per

episode for a 20-24 year old, to A$3,300 for a 60-64 year old, to ~A$4500 for an 85+ year

old.

Figure 19: Annual private hospital fee per episode by age group

0

500

1000

1500

2000

2500

3000

3500

4000

4500

50000–4

5–9

10–1

4

15–1

9

20–2

4

25–2

9

30–3

4

35–3

9

40–4

4

45–4

9

50–5

4

55–5

9

60–6

4

65–6

9

70–7

4

75–7

9

80–8

4

85

+

Ave

rage

pri

vate

ho

spit

al f

ee p

er in

sure

d A

ust

ralia

n (

ex

Med

icar

e b

enef

its)

A$

Source: PHIAC, Credit Suisse estimates

18 December 2013

Ramsay Health Care


Organic costs - growth assumes flat EBIT margin

We assume zero real cost growth, or, that the organic EBIT margin to FY20 remains

consistent with FY13. Real cost growth between FY09 and FY13 was 0.3% per annum

(Figure 10), so this assumption assumes ongoing organic cost savings. However, real cost

growth also coincided with real pricing growth of 1.1% over the same period (Figure 6) so

we believe having zero cost growth but with flat organic EBIT margins is reasonable. The

assumption is EBIT margin expansion can only occur from brownfields.

Brownfields - estimate ROIC of 15% after 3 years

Revenues/costs

Our organic revenue growth numbers are revenues to be generated by brownfields

expansion. However we model brownfields costs separately to costs of the existing RHC

business as we lack insight into the cost synergies that RHC gains via brownfields

development. Therefore in order to forecast brownfields operating costs our forecasts use

management's guidance that brownfields generate ROIC of 15% after 3 years.

This is the most contentious of our assumptions, in our view, as we have no further data

sources for support. Yet based on analysis of EBIT growth, as well as RHC's disclosure

that its brownfields program has been successful to date, we believe that brownfields

developments have on average reached this target.

In our forecasts we also include incremental EBIT added from brownfields developments

completed in the last 2 years (FY12 and FY13) that by inference were yet to reach 15%

ROIC in FY13 - we assume incremental ROIC is 5% per year until 3 years post

completion.

Growth capex

To derive the brownfields capex RHC would need to fund organic growth in Australia7, we

have:

■ calculated the number of operating theatres required to service 2.0% organic volume

growth over the next 5 years; and

■ multiplied this amount by the estimated A$15.1mn capex cost of a new theatre.

Refer to Figure 20. On our estimates, RHC needs to spend A$77mn to A$87mn per year

(in real terms) between FY14F and FY20F to fund organic volume demand in Australia.

Figure 20: Estimated capex required to service organic growth (%)

FY13 FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Number of OTs no. 255 260 265 271 276 282 287 293

Growth % 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Number of OTs required no. 5 5 5 5 6 6 6

Cost per OT (real) A$mn 15.1 15.1 15.1 15.1 15.1 15.1 15.1

Growth capex required for organic demand A$mn 77.0 78.6 80.1 81.7 83.4 85.0 86.7


7 We assume any greenfields developments take market share rather than meet organic growth

requirements

18 December 2013

Ramsay Health Care


Maintenance capex

Consistent with recent historical requirements we assume maintenance capex is 2.5% of

invested capital, resulting in expected maintenance capex forecasts as set out in Figure

21. Note that our definition of invested capital is current capital invested plus growth capex

required to service organic growth.

Figure 21: Maintenance capex forecasts

FY13 FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Australian invested capital 3352 3517 3688 3865 4048 4237 4433 4635

Estimated % of invested capital 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Maintenance capex 84 88 92 97 101 106 111 116


Implied future ROIC

Using the inputs/assumptions above we derive forecast organic ROIC - see Figure 22 –

with ROIC declining from 14.7% in FY13 to 12.7% in FY20F.

Figure 22: Organic ROIC forecasts to FY20F of RHC's Australian hospitals business

13.1%

13.7%

14.1%

14.7%

14.6% 14.4%

14.0%

13.7%

13.3%

13.0%

12.7%

12%

13%

13%

14%

14%

15%

15%

FY10 FY11 FY12 FY13 FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Au

stra

lia R

OIC

Forecast ->


If RHC simply services organic growth in the Australian market, then its Australian ROIC

will decline, based on assumptions outlined above.

In our view RHC needs to either:

1) sustain real price increases from funders above the 0.2% natural rate it should

receive from population ageing; or

2) lower real costs, which, despite successful cost saving programs since FY09, it

has yet to achieve (0.3% real cost-price CAGR since FY09).

As in our view material further cost reductions will be harder to find in the future than in the

FY09-FY13 period RHC will need to rely on continued real pricing growth in its funding

from insurers (and other payers such as DVA/State Governments) to maintain or increase

Australian hospitals ROIC.

18 December 2013

Ramsay Health Care


Scenarios and sensitivity Given the importance of real pricing growth to RHC's ROIC we assess future ROIC

outcomes and RHC equity valuation sensitivity to various real price growth outcomes

below.

Scenarios

■ Current forecast – our current forecasts assume real revenue pricing growth of 0.7%

CAGR until FY23F resulting in growth in Australian hospitals ROIC from 14.7% to

16.8% by FY20F. This is back-solved from our current earnings forecasts (we do not

specifically model real pricing growth).

■ Scenario 1 – Real price growth of 1.1% attained in FY09-FY13 continues

(assumes RHC maintains its pricing power and leverage over private insurers). Under

this scenario RHC achieves substantial ROIC growth, with Australian ROIC rising to

18.6% in FY20F from 14.7% in FY13.

■ Scenario 2 – Real price growth of 0.5% CAGR – Australian ROIC growth increases

each year but at a mild rate, increasing from 14.7% in FY13 to 15.6% in FY20F.

■ Scenario 3 – Real price growth of 0.0% CAGR – Australian ROIC declines to 12.7%

by FY20F.

Assuming organic brownfields/volume growth assumptions as per Figure 20 hold

(excluding the assumption focussed on by the scenario), ROIC under each scenario is set

out in Figure 23.

Figure 23: Historical ROIC and forecast ROIC under various price CAGR scenarios

12.0%

13.1%

13.7%

14.1%

14.7%

15.5%

16.2%

16.7%

17.2%

17.7%

18.2%

18.6%

15.1%15.3% 15.4% 15.4% 15.5% 15.6% 15.6%

14.6%14.4%

14.0%

13.7%

13.3%

13.0%

12.7%

15.3%

15.7%15.9%

16.1%16.4%

16.6%

16.8%

12%

13%

14%

15%

16%

17%

18%

19%


Au

stra

lia R

OIC

Scenario 1: 1.1% real pricing growth Scenario 2: 0.5% real pricing growth

Scenario 3: 0.0% real pricing growth Current CS: 0.7% real pricing growth

Forecast ->


Clearly the long-term pricing that RHC receives from insurers will have a dramatic effect

on returns.

18 December 2013

Ramsay Health Care


Valuation scenarios

Our current valuation of A$41.50 per share assumes 0.7% real pricing CAGR over the

next 10 years.

■ Using a 1.1% real price CAGR as per Scenario 1, our RHC valuation rises to A$46.50,

12% above our current target price.

■ 0.0% real price CAGR (Scenario 3) gives a valuation of A$32.20, 22% below our

current share price.

Refer Figure 24

Figure 24: RHC valuations under Australian hospitals real pricing CAGR scenarios

46.50

41.50

32.20

25

30

35

40

45

50

1.1% real price CAGR 0.7% real price CAGR - CURRENT CS 0.0% real price CAGR

A$

p/s

har

e

12%

-22%


Sensitivity

Using parameters as described above we estimate that a 0.1% change in real pricing

CAGR over the next 10 years translates into a 3.1% change in the valuation of RHC

shares.

Brownfields scenario

In our opinion the assumption carrying the most risk in our forecasts is that of brownfields

ROIC. While RHC states that it achieves 15% ROIC on brownfields after 3 years, we

believe this is just a business case target and brownfields may generate higher returns.

We assess the ROIC outlook for RHC under the scenarios above, but adjust brownfields

ROIC to 20% after 3 years rather than 15% in the future.

Over a 7 year period (to FY20F) ROIC of the RHC group would increase by 0.5% -

therefore the impact is not that significant on the company (see Figure 25).

The valuation uplift is 4.0%.

18 December 2013

Ramsay Health Care


Figure 25: Impact on RHC group ROIC of increasing Australian brownfields projected

ROIC from 15% to 20%

12.0%

13.1%

13.7%

14.1%

14.7%

15.5%

16.3%

16.9%

17.5%

18.0%

18.5%

19.1%

15.1%

15.3%15.5%

15.7%15.8%

15.9%16.1%

14.4%

14.2%

13.9%

13.6%13.4%

13.2%

12%

13%

14%

15%

16%

17%

18%

19%

20%


Au

stra

lia h

osp

ital

s R

OIC

-B

row

nfi

eld

s 1

5%

RO

IC (

das

he

d),

20

% R

OIC

(s

olid

)

Forecast ->


18 December 2013

Ramsay Health Care


Appendix Figure 26: Data for volume, price and mix growth 2013 - 2020

2013 2020

Age group Population Episodes Price Revenues (ex

Medicare)

Population Episodes Price Revenues (ex

Medicare)

mn no. A$ A$mn mn no. A$ A$mn

0-4 1523 23723 2424 58 1662 25888 2901 75

5-9 1444 10252 1704 17 1645 11679 1704 20

10-14 1416 8556 2157 18 1576 9523 2157 21

15-19 1502 19592 2593 51 1505 19631 2593 51

20-24 1636 22111 2657 59 1602 21651 2657 58

25-29 1684 24646 3306 81 1714 25085 3306 83

30-34 1595.5 39409 3441 136 1802 44510 3441 153

35-39 1593.5 44417 3140 139 1745 48640 3140 153

40-44 1607.5 44922 2798 126 1600 44712 2798 125

45-49 1574.5 50112 2816 141 1703 54202 2816 153

50-54 1529.5 63837 2884 184 1565 65319 2884 188

55-59 1386 76275 3088 236 1569 86346 3088 267

60-64 1259 92325 3306 305 1419 104058 3306 344

65-69 1043 90052 3517 317 1236 106716 3517 375

70-74 773 82151 3740 307 1108 117753 3740 440

75-79 583.5 74612 3733 279 755 96542 3733 360

80-84 446 63148 3934 248 511 72351 3934 285

85+ 436.5 40153 4550 183 523 48110 4550 219

Total 23033 870293 2885 25240 1002716 3369

CAGR, 2013 - 2020 1.3% 2.0% 2.2%

Source: ABS, PHIAC, Credit Suisse estimates

18 December 2013

Ramsay Health Care


Reference Appendix

Our new “Total return forecast in perspective” chart helps visualize Credit Suisse and consensus views of a company’s 12-month return within the

context of forecasting risks and its historical trading pattern:

12mth Volatility is calculated as the annualised standard deviation of weekly total return series over the past 12 months. It illustrates variability of

stock returns; in other words, risk. The way to think about it is that one would rather take 10% forecast return from a stock that has 20% volatility,

than from the stock that has 40% volatility. The shaded area shows the one standard deviation range based on past 12 months volatility. In statistical

terms, once you make a number of brave assumptions, there is a 68% probability that the share price will end up inside that range in 12 months time.

52wk Hi-Lo is maximum and minimum daily closing price over the past 52 weeks. It is often handy to know the price momentum especially when the

stock is trading close to its highs and lows: Is the stock

trading close to its peak? Is the momentum against the stock?

*Consensus is IBES consensus supplied by Thomson Reuters. IBES is a survey of sell side research analysts, collecting a few dozen data

points such as EPS, DPS, Sales, Target Price, ROE and so on. *Mean is the average of target returns, while the shaded area around the mean

represents the range of estimates from the lowest to the highest estimate. This aids visualisation of a number of important factors such as: the range

of analyst estimates; where Credit Suisse’s estimates on this stock sit relative to consensus; and where the share price is relative to consensus

mean and consensus range target.

Target return is calculated as capital gain plus forecast dividend yield (net) over the next 12 months. For “CS tgt” we have used Credit Suisse’s

target price and Credit Suisse forecast for 12-month forward dividend, grossed up for franking. For the consensus mean and range, we have used

consensus target price and consensus dividend forecasts for 12 month forward.

18 December 2013

Ramsay Health Care


Companies Mentioned (Price as of 18-Dec-2013)

Ramsay Health Care (RHC.AX, A$41.61, NEUTRAL, TP A$41.5)

Disclosure Appendix

Important Global Disclosures

Saul Hadassin and William Dunlop, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Ramsay Health Care (RHC.AX)

RHC.AX Closing Price Target Price

Date (A$) (A$) Rating

21-Dec-10 17.38 19.50 N

04-Apr-11 18.85 20.40

06-Jul-11 17.81 19.75

25-Aug-11 17.52 19.75 O

24-Feb-12 18.16 20.30 N

16-Aug-12 23.44 24.60

23-Aug-12 23.74 25.00

26-Feb-13 30.89 32.90

08-Apr-13 32.34 34.50

29-Aug-13 36.00 38.00

02-Dec-13 39.15 41.50

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's covera ge universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the mo st attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a s tock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

18 December 2013

Ramsay Health Care


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (54% banking clients)

Neutral/Hold* 40% (50% banking clients)

Underperform/Sell* 15% (42% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underp erform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings a re determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Ramsay Health Care (RHC.AX)

Method: Our 12-month forward target price of $41.50 for RHC.AX has been derived using a discounted cash flow (DCF) methodology, utilising a risk-free rate of 4.5%, beta of 0.80 terminal growth rate of 2.2% and an equity risk premium of 6%.

Risk: Risks to our 12-month forward target price of $41.50 for RHC.AX include delays or failure to execute upon brownfield development opportunities, regulatory changes that may affect levels of private health insurance coverage, failure to reach satisfactory commercial relationships with a key private health insurance funds, and greater than expected labour cost inflation. There are also risks associated wtih expansion into the UK including successful bedding down of the Capio acquisition and potential for the NHS to cut back on outsourcing contracts.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (RHC.AX) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (RHC.AX) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (RHC.AX) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

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As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the

18 December 2013

Ramsay Health Care


NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Equities (Australia) Limited ..................................................................................................... Saul Hadassin ; William Dunlop, CFA

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18 December 2013

Ramsay Health Care


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