Raffles Medical Group Ltd: Sign of stronger pulse May 2, 2018

PSR Recommendation: ACCUMULATEStatus: MaintainedTarget Price: SGD1.32
  • 1Q18 Revenue/PATMI met 23.5%/23.1% of our full year expectations
  • Stronger performance on uptick in private healthcare service demand in 1Q18
  • New capacities in Singapore and China to meet growing regional healthcare needs
  • Maintained Accumulate with unchanged TP of S$1.32

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The Positives

  • Recovery in Healthcare services, driven by higher local patient load. Healthcare services (Clinic) turnaround with a strong 6.8% YoY growth in 1Q18, after a contractionary 1Q17 and FY17 at -2.0% and -1.6% respectively. The Public-Private Partnership, namely the PCN Scheme (Primary Care Network) and the Air Borders Screening contract with MOH (Ministry of Health) have lent support in the uplift.
  • Hospital services gaining momentum with expanded capacity in RafflesSpecialistCentre. The new RafflesSpecialistCentre commenced operation since 22 Jan-18. The segment registered 4.2% YoY growth as compared to -1.9% in 1Q17. Commendable, Management shared that foreign patient load grew c.2% YoY in 1Q18, despite persistent headwinds in medical tourism, particularly a strong SGD.

With the relocation and expansion of 15 specialist centres to the new RafflesSpecialistCentre, RafflesHospital is now undergoing refurbishment. By 3Q18, the Group will have expanded bed capacity and outpatient primary care centres to cater for the growing local and foreign demand.

The Negative

  • Operating margin likely to remain under pressure. Recruitment drive for medical staff and hospital management staff for RafflesHospital Chongqing have commenced. 3Q18 and 3Q19 will likely to see a greater margin squeeze with RafflesHospital Chongqing and RafflesHospital Shanghai scheduled to open in 4Q18 and 4Q19 respectively.

We expect staff costs to remain above 50% of Group’s revenue in coming years when patient volumes 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.

  • The public service outsourcing could add another 5% to Healthcare service in FY18e. These initiatives could expand potential patient pool, as well as increase utilization rate of its existing facilities (i.e. higher productivity and enhanced efficiency).
  • Enduring short-term pain for long-term gains. Management expects each new hospital to report operating profit only after three years 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$280mn, 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 gearing ratio as at end-1Q18 was at 9.5%.

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: (i) Stronger demand from the MOH partnership; and (ii) Better than expected performance in China hospitals

Figure 1: Peers Comparison

Raffles Medical Group is currently trading at 30.5x forward PER, which is a 13.6% discount to its regional peers’ average of 35.3x.

Its FY18e dividend yield of 1.9% is higher than its regional peers’ average of 1.6%.

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Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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