• FY17 Revenue/Adjusted PATMI were in line with our full year expectations
• Beneficiary of MOH’s initiatives with new capacity to meet growing demand
• Declared higher final dividend of 1.75 cents (Full year dividend of 2.25 cents, +12.5% YoY)
• Maintained Accumulate with unchanged TP of S$1.32

The Positive

+ Higher local patient load and rental income mitigated weaker healthcare services segment. Its insurance business (contributing <10% of Healthcare services Revenue) was hit by lower renewal of international healthcare plans for expatriates, particularly from the financial sector. Strong local demand underpinned growth amidst plateaued foreign patient volume growth.

Raffles Holland V is now fully leased with around 4.7% net rental yield. Note that it only recorded one quarter of rental income in FY17 (upon the end of one-year rental-free provision); we would see a higher rental income in FY18 due to a full year contribution from Raffles Holland V.

+ Expanded capacity in RafflesHospital and RafflesSpecialistCentre to cater for the growing local and foreign demand. The new RafflesSpecialistCentre (RafflesHospital’s extension) has commenced operation since 22 Jan-18.

Various specialist centres and the radiology centre have been relocated to the new building from RafflesHospital. Meanwhile, RafflesHospital is undergoing construction to open up new wards to increase bed capacity, as well as to refurbish the podium for new commercial outlets. The construction is slated for completion by end May-18.

The Negative

– Staff costs to remain elevated as the Group gears up for the two new hospitals in China. We expect staff costs to stay above 50% of Group’s revenue in coming years until patient volume picks up in RafflesSpecialistCentre, MCH (MC Holdings) and the two new hospitals in China.

Outlook

Outlook remains positive despite medium-term margin pressures from higher staff costs and start-up costs from the gestation of its two new China hospitals.

• New growth avenues from public service outsourcing could add another 5% to Healthcare service. Following the Emergency Care Collaboration since Jun-15, the Group has recently deepened the partnership with the MOH (Ministry of Health) via (a) a 5-year term PCN Scheme (Primary Care Network), and (b) the Air Borders Screening contract. The PCN Scheme will be supported via three partnership clusters around Singapore (43 clinics island wide); while the Air Borders Screening would provide temperature screening and infectious disease surveillance at Changi and Seletar Airports by tapping onto its existing and exclusive medical service. These initiatives could expand potential patient pool, as well as increase utilization rate of its existing facilities (i.e. higher productivity and enhanced efficiency).
• Expansion on-track with strongest start-up losses incurring in FY19-20. Its two China hospital projects are on-track to commence operations: RafflesHospital Chongqing (4Q18) and RafflesHospital Shanghai (4Q19). Management has earmarked three years before each hospital to break even and guided estimated start-up losses of S$2.5mn, S$11.25mn, S$12.5mn and S$3.75mn in FY18 to FY21 respectively. The Group generates c.S$100mn of EBITDA a year.
• Remaining CapEx (capital expenditure) of S$300mn, to be spread across FY18-19. We expect the Group to partially fund the two China hospitals with RMB-denominated debt. Management guided to cap gearing ratio at 50%, which implies much headroom for loans as the end-FY17 gearing ratio was at 10.8%. 

Maintained Accumulate with unchanged TP of S$1.32

We remain upbeat on the potential growth that these new hospitals in China would bring to the Group: (i) Diversification with a higher contribution for overseas operation; and (ii) Tapping into China’s growth.

Potential re-rating catalysts:

• Stronger demand from the MOH partnership
• Better than expected performance in China hospitals

Figure 2: Peers Comparison

Raffles Medical Group is currently trading at 28.7x forward PER, which is a 36.4% discount to its regional peers’ average of 45.1x.

Its FY18e dividend yield of 2.0% is 33.3% higher than its regional peers’ average.

A Sneak Preview of the new RafflesSpecialistCentre