Increasing Ramsay Health Care (RHC) | Blended & Concentrated Funds
On the 20th April 2022 Ramsay Health Care (RCH) announced it had received an acquisition proposal from a consortium led by the private equity company KKR. The RHC board has granted due diligence to the consortium following a $88 per share cash bid for the hospital group. The implied 12- month forward EBITDA multiple is ~13.5 times.
We view the bid for RHC as opportunistic given RHC’s earnings have been depressed throughout the pandemic and are now well placed to recover with an unprecedented post COVID backlog of patients. Moreover, the value of RHC’s owned Australian hospital assets provides the optionality of the release of capital through a sale/leaseback by the KKR consortium.
While the bid is subject to both regulatory and shareholder approval, we feel that the KKR consortium has been carefully considered to include Hesta (the national industry superannuation fund representing healthcare workers) and the Ramsay Foundation (~19% shareholder) is supportive of the process. We have added to our position in RHC following the announcement of the bid as the current share price is trading ~9% below the $88 offer price and is opportunistic ahead of a global industry recovery in elective surgery.
Increasing Macquarie Group (MQG) | Blended, Income & Concentrated Funds
MQG has slightly lagged the market for the year to date, with a return of -1.3% versus +1.4% for the ASX200. Macquarie has firmly established its Green Investment Group (GIG, acquired 2017) as a leading financier and developer of green infrastructure including renewable energy projects, active in more than 25 markets. On April 1st, GIG was transferred into the Macquarie Asset Management (MAM) division, which manages more than $735.5b globally for institutions, pension funds, governments and private investors across asset classes, but with particular expertise in infrastructure and real assets.
By restructuring the divisional ownership of GIG, MAM funds will be able to take direct ownership stakes in GIG’s developments, completing the loop of developing, financing, owning, managing and trading the output of these projects by Macquarie entities. Including its time as a UK semi-government institution, GIG has developed more than 11 GW of operational projects including funding and arranging of more than $50b, but more importantly it has a development pipeline of more than 35GW.
We expect this move to contribute to MAM’s growth in funds under management, while the increased activity, volatility and supply chain disruption in energy and commodity markets is driving increased demand for the risk management, financing and logistics services offered by MQG’s Commodities and Global Markets division. Together these divisions contribute ~70% of Macquarie’s net profit. MQG trades on a forecast FY March 2022 price earnings ratio of 19x and dividend yield of 3.1%.
Reducing Commonwealth Bank (CBA) | Blended Portfolio
The retail banking sector has led the market over 2022, driven by strong credit growth in Housing and Business markets, increasing bond yields and the factoring of Reserve Bank rate increases for the second half of the year, while bad debts have remained under control in part due to substantial government assistance to businesses and households. Greater competition in mortgage markets has, however led to lower net interest margins for all four of the major banks.
CBA’s housing loan growth was 8.4% over the 12 months to March compared to system growth of 7.8%, with its business loan book growing by 11.9% versus system growth of 9.5%. This has maintained its market leading position in mortgage lending but at a cost to margins. With a period of exceptionally strong house price growth and heavy competition for variable loans coming into a Reserve Bank hiking cycle that is set to start later than other major economies, the potential impact on housing and business markets makes us more cautious on the outlook for banks into the second half of 2022.
Reducing National Australia Bank (NAB) | Concentrated Portfolio
The retail banking sector has led the market over 2022, driven by strong credit growth in Housing and Business markets, increasing bond yields and the factoring of Reserve Bank rate increases for the second half of the year, while bad debts have remained under control in part due to substantial government assistance to businesses and households. Greater competition in mortgage markets has, however led to lower net interest margins for all four of the major banks. NAB’s housing loan growth was 8.9% over the 12 months to March compared to system growth of 7.8%, with its business loan book growing by 13.5% versus system growth of 9.5%. This has grown its position in mortgage lending and increased its market leading position in business lending, but at a cost to margins. With a period of exceptionally strong house price growth and heavy competition for variable loans coming into a Reserve Bank hiking cycle that is set to start later than other major economies, the potential impact on housing and business markets makes us more cautious on the outlook for banks into the second half of 2022.