Why the Ramsay (ASX:RHC) share price is outperforming the ASX today

The Ramsay Health Care Limited (ASX: RHC) share price is beating the market gloom this morning after striking a new agreement with the UK’s National Health Service.

Shares in the hospital operator jumped 1.7% to $68.38 during lunchtime trade. That stands in contrast to the 0.6% dive by the S&P/ASX 200 Index (ASX: XJO).

Ramsay announced after the market closed yesterday that it reached a new volume-based agreement with NHS England (NHSE).

Ramsay share price bolstered by NHSE agreement

Like the previous agreement, the ASX-listed hospital group can continue providing private patient activity. This is a relief to investors as I will explain later.

The difference is the NHSE may trigger a “Peak Surge Period” on seven days’ notice if it requires Ramsay to help manage a spike in COVID-19 cases. Should that happen, Ramsay will be paid on a cost recovery basis.

This agreement comes into effect from today and runs till 31 March. It may be extended by mutual agreement on or before 15 March.

COVID restrictions crimps the Ramsay share price

The surge in COVID cases is bad news for Ramsay’s earnings as hospitals tend to make bigger profits from elective surgeries.

This is why the Ramsay share price has been under pressure recently. Its hospitals in New South Wales had to stop performing non-urgent treatments in response to the flood of patients with the Omicron COVID variant being admitted to hospitals.

Ramsay announced on Friday that the NSW Ministry of Health has put restrictions on overnight Category 2 and Category 3 elective surgery.

No light at the end of COVID tunnel

The move follows Victoria’s Department of Health and Human Services (DHHS) decision to suspend non-urgent elective procedures.

Unlike the deal struck with NHSE, the restrictions imposed by NSW and Victorian health authorities have no end date. Ramsay and shareholders don’t know when it can return to “business as usual”.

The only silver lining is that January tends to be the quietest month for Ramsay Australia. Elective surgery patients rather lie in the sun than in hospital beds till after the school holidays end.

Foolish takeaway

Nonetheless, Ramsay has warned investors that it is expected to take a $55 million hit to earnings before interest and tax in the first quarter of this financial year.

This could change depending on how long the restrictions last and if NHSE triggers the Peak Surge Period.

Looks like it’s too early to hope that the COVID cloud will start to dissipate in 2022.

The Ramsay share price is lagging behind other medical facility operators. Over the past 12-months, its shares have gained around 12%. But the Healius Ltd (ASX: HLS) share price and Sonic Healthcare Limited (ASX: SHL) share price have gained around 30% each.

This is because the latter two run COVID tests, something Australians can’t seem to get enough of.

The post Why the Ramsay (ASX:RHC) share price is outperforming the ASX today appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited and Sonic Healthcare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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