ScoPo’s Powerplays: Hold the presses as KKR pulls bid on Ramsay Healthcare
Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 24 years, explains what the movers and shakers have been doing in health and gives his ASX Powerplays.
In a positive for grape growers globally, studies have shown health benefits of eating the fruit including reducing your chances of developing dementia, fatty liver associated with Western diets and even a longer lifespan.
According to research published in the international, peer-reviewed journal of food science Foods the fruit is especially beneficial to people living by high-fat Western diets as they’re rich in chemicals that boost healthy gut bacteria and lower cholesterol.
Fatty liver disease is a common condition caused by the storage of extra fat in the liver and is considered a growing health problem because of unhealthy eating habits. The condition if left untreated can lead to liver failure and liver cancer.
In the study female mice were fed high-fat Western-pattern diets, with half of the mice receiving grape supplements. Scientists then compared liver and brain function along with metabolic health of the two groups.
The study found that grape supplements extended the lifespan of the mice, boosted metabolism and reduced the risk of fatty liver disease.
Grapes have been found to be high in antioxidants which are well-known to improve health and prevent disease and cancer including cancer. The research also found that the antioxidants in grapes can protect the brain against developing dementia by improving the function of neurons or nerve cells.
And it hasn’t been such a positive end to the week for private hospital operator Ramsay Healthcare (ASX:RHC). The big news for the ASX health sector this week came on Friday afternoon with the Stockhead editors told to “hold the presses” for this story. Or the modern equivalent of “don’t press publish”, which sadly doesn’t sound as good.
RHC went into a trading halt on Friday on the same day it released mixed results for FY22, before announcing a consortium led by US investing giant KKR had pulled out of its indicative proposal to acquire 100% of the shares in RHC by way of a scheme of arrangement at $88/share all cash offer. The deal would’ve valued RHC at more than $20 billion.
Consequently, investors reacted with the RHC price taking a tumble when trading resumed at 1.32pm (AEST) dipping 4.21% to $69.90.
According to the announcement the consortium has advised RHC that it has “elected to no longer seek due diligence access from Ramsay Santè and has advised the board of Ramsay Santè accordingly”.
Ramsay Santè is the French subsidiary of RHC, for which it owns 52.8%.
The deal is not completely off but maybe just not as sweet. Ramsay disclosed the terms of KKR’s alternative proposal on Thursday night as it was preparing to release Friday’s FY22 results.
The alternative proposal sees RHC shareholders pad $78.20 cash for its Australian operations and either cash or scrip for the Santè stake. RHC shareholders would be able to elect to receive 100% cash consideration of $88/share (less dividend declared or paid after January 31, 2022) for their first 5000 shares or less. Those with with more than 5000 shares would receive stock in Santè.
The deal has been ongoing since April with KKR, which owns another large French hospital group Elsan, pursuing but unable to secure due diligence at Santè and now moving on to the alternative proposal.
Meanwhile, RHC missed its NPAT by ~15% reporting $274 million, compared with consensus of $321 million. Revenue was in line with consensus at $13,740 million, albeit benefiting from government Covid-19 payments and other support. Profit and margins were down to 6.5% on pcp.
“The share price is reflecting the uncertainty, falling more than 4% to below $70 so I’d simply say there’s still a fair bit of work to do on both sides to get a deal which is capable of being recommended by Ramsay,” Power said.
ASX health stocks are slightly up for the week. By 2.45pm (AEST) on Friday the S&P/ASX 200 healthcare index (ASX:XHJ) was up 0.16% in the past five days, while the S&P/ASX 200 (ASX:XJO) index rose 0.10%.
“The share prices have been rolling off but we had that strong rally in the market in July and early August and I think what we are seeing now is a bit of profit taking coming through,” he said.
Reporting season has continued this week for ASX health stocks, which Power said has been mostly positive.
“We’ve had reasonably good results and the outlook commentary has been encouraging which all goes well for the next 12 months,” he said.
Hearing solutions giant Cochlear (ASX:COH) released its results this week, tracking Morgan’s estimates and guidance, albeit below consensus. Cochlear reported strong sales growth and gross margins at pre-Covid levels with double-digit underlying profit.
Power said sound processor upgrades and acoustic implants were solid, with all regions above pre-Covid levels, while Cochlear implant growth improved throughout the year, although varied by country on differences in pandemic-impacted recoveries.
“It was up strongly on the day of its results but again there is some profit taking coming which is an example of the profit taking coming in,” Power said.
“Cochlear had a good result and yet people have been selling with the share price strength which sees it marginally for the week despite reporting some good numbers.”
Operating in the personal protective equipment space (PPE) space Ansell (ASX:ANN) released its FY22 results this week. Underlying results were in line with Morgan’s guidance but mixed, with lower organic sales and growth profit margins compressing, but higher than expected profit on considerably lower selling, general and administrative expenses (SG&A) and tax.
Margins and profitability were impacted across multiple fronts, from selling high cost Exam/SU inventory and Covid-19 manufacturing shutdowns to labour shortages and increased raw material as well as elevated freight costs.
“We got a positive surprise with Ansell and are still sticking with the Hold recommendation,” Power said.
Morgans was also surprised with the result for the ASX’s second largest healthcare company wth a $16 billion market cap Sonic Healthcare (ASX:SHL). The medical diagnostics provider reported a revenue for the full year of $9.34 billion, a 7% increase on last year. Sonic’s reported record bottom line net profit of $1.46 billion, an 11% increase on the pcp.
Power’s pick for last week, heavily shorted Nanosonics (ASX:NAN), saw its share price dropping ~13% in the past five days after releasing its FY22 results, which Power said were broadly in line with expectations.
Revenue was $120.3 million, up 17% on pcp and in line with guidance, while capital sales were $37.7 million, an increase of 41% on pcp reflecting recovery from Covid-19 disruptions.
Nanosonics has developed and commercialised the trophon EPR device, a unique automated disinfection technology, which was the first major innovation in disinfection for ultrasound probes in more than 20 years.
“We were telling clients to trim positions above $5 and we have now seen the share price fall for the week to around $4.40 so the result came in line with what the market and we were expecting,” he said.
Power said of interest is the expected time to launch its second major product, a flexible endoscope, called the CORIS, to market. In Morgan’s view it is likely to take a couple of years. Morgans has moved from an Add to Hold recommendation for Nanosonics with a 12-month target price of $4.87.
“Getting CORIS to market still seems some time away which has seen some share price weakness this week,” he said.
Health imaging company Mach 7 (ASX:M7T) is Power’s stock of the week. The company is due to report its FY22 results on Monday.
M7T is a global provider of enterprise image management systems enabling healthcare enterprises to identify, connect and share diagnostic imaging and patient care information when and where it is needed.
M7T business mix has been trending to more SaaS-style contracts, rather than capital, resulting in a 60:40 split compared with 50:50 in FY21, which is viewed as a positive for the longer term value of the business.
“This company has done everything right for the past 12 months including growing its revenue, it’s profitable and their outlook commentary is positive so we are not expecting any surprises in their results,” Power said.
The M7T share price is down ~1.5% in the past five days and ~22% year to date. The company has a market cap of ~$155 million.
“The share price has not done that much as there’s still a bit of lack of interest at the smaller end of the market so we think when they report the commentary will be positive and therefore worth jumping in on ahead of result on Monday.”
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.