• FY2016 Revenue of S$473.61 mn was in line with our forecast of S$486.26 mn
• FY2016 PATMI of S$70.21 mn missed our forecast by 8.1%. Surprise mainly came from higher-than-expected losses from MCH and higher effective tax rate
• RafflesMedical to drive FY17F topline; Expect further margin compression before MCH breakeven while RMG continues to gear up for expansion
• Final dividend of 1.5 Cents; FY2016 dividend of 2.0 Cents (same as FY2015)

Revenue growth driven by increased patient load and higher contributions from all segments, particularly from the newly acquired International SOS (MC Holdings) Pte Ltd and its subsidiaries (collectively known as “MCH”). Excluding MCH, top line would have grown by only 7.5% year-on-year (“yoy”). However, the increased staff costs from MCH remains a drag. Raffles Medical Group Ltd (“RMG”) has stepped up its cost management effort and expects to see better results in next few quarters.

Results at a glance

RafflesMedical to drive growth in FY2017, contributing c.48% of FY17F revenue (up from c.44% in FY2016). Although RafflesHospital has the highest margins, it is expected to grow at a mid-single digit rate in FY2017 amid challenging macro environment. Hospital Services growth has slowed to single-digit rate in the past three years due to slower growth in foreign patient load and a stretched space in RafflesHospital. Although RafflesHospital Extension is on track for completion, we do not expect a significant contribution to FY17F earnings as it is slated to be operational by 4Q FY2017. On the other hand, its expanding network of clinics as well as growing corporate clients will support RafflesMedical’s double-digit growth rate.

Positive on MCH’s growth potential but cost rationalisation takes time. MCH has yet to breakeven in FY2016 due to the high integration costs incurred and higher-than-Group level’s operating expenses. MCH’s staff costs as a percentage of revenue is still at 56% as at end-FY2016, albeit improved from 60% when it was initially acquired. Management reiterated that RMG had only started managing MCH in April 2016 and would require few more quarters before it turns around. RMG has appointed two General Managers to improve operational efficiencies at the Healthcare Services business in IndoChina and to ultimately improve margins there. RMG’s expansion plans by leveraging on MCH’s network of clinics, particularly the fast-growing clinics in China, could open up RMG’s potential customer base to the top 20% of China population, which are considered as the upper income group. The Group intends to add two or three more MCH clinics in China this year.

Strong financial positions to support its expansion plans.

Improved net cash position (increased to S$81.5 mn from S$53.8 mn a year ago) and its strong operating cashflows (cashflow from operating activities of S$78.9 mn in FY2016) will enable the Group to support its investments in MCH, RafflesHospital Extension, and partially RafflesHospital Shanghai.

The remaining CapEx are estimated at:

• S$94 million for RafflesHospital Extension; and
• S$98 million earmarked for RafflesHospital Shanghai.

RMG has a healthy cash position of S$111.9 million as at 31 December 2016. We expect the Group to partially fund its RafflesHospital Shanghai project with debt.

Investment risks which could dampened healthcare demand in Singapore:

• slower economic growth and uncertainties in Singapore and the region
• strong SGD against neighbouring currencies
• intensifying competition for medical tourism between Singapore, Thailand and Malaysia

Maintained ‘Accumulate‘. We have cut our FY17-18F Revenue by c.6% and adjusted for higher operating costs, which translates to a slightly lower DCF-derived target price of S$1.60 (previously S1.62). We expect its RafflesHospital Extension and the RafflesHospital Shanghai to boost its revenue after its launches in 2017 and 2018, respectively. Expansion of its domestic and regional business operations will keep FY17-18F operating expenses high as RMG continues its recruitment drive to cater to the expansion of its Hospital and Healthcare Services operations in Singapore as well as in Indochina region. We have also cut our FY17-18F dividend as we expect RFMD to reinvest at least half of its earnings into MCH, RafflesHospital Shanghai and RafflesHospital Extension.

Details of expansion plans

a) RafflesHospital Extension

It will contribute an additional 220,000 square feet or c.72% of gross floor area to RafflesHospital. Management shared that half of the space would be used to expand its range of specialist services, healthcare training and clinical research; while the other half would be leased to tenants of complementary or medical-related businesses. If demand arises, the leased area would be reclaimed for growth and expansion in the future years. The Group intends to add c.50 new beds after moving existing specialist centres to the new integrated medical complex. Additional bed capacity would provide room for RafflesHospital to grow.

b) RafflesMedical

• Continue to nurture and grow its multi-disciplinary medical facilities, i.e. RafflesMedical Orchard and Raffles Holland V.
• Further expanding its network of clinics, domestically (new clinics in Hillion Mall and Changi Airport Terminal 4) and abroad (two to three new clinics in China).
• Continues to grow its portfolio of corporate clients through the RafflesOne corporate portfolio package. RafflesMedical Hong Kong had secured another significant corporate client, Hong Kong Shanghai Banking (HSBC), in January 2017.