The positives
+ Marginal growth in revenue after a weak quarter in 1Q17: Management noted that the uptick was underpinned by a 3% QoQ patient load growth (mainly from local patients), and a 1% QoQ of pricing adjustment to inflation.
+ More significant contribution from Raffles Holland V: It is now at full occupancy and management is expecting a gross rental yield of 5.8%.
The negatives
– Persistent staff cost pressure as the Group ramps up its operations in Singapore and abroad. We expect staff costs to remain above 50% of Group’s revenue in coming years, eroding profitability until patient volume picks up in RafflesHospital Extension, MCH (“MC Holdings”) and the two new hospitals in China.
– Higher costs erode competitive advantage, mainly due to Stronger Singapore dollar compared to its regional peers. Management noted foreign patients shift from inpatient to outpatient, i.e. foreign patients may seek cheaper inpatient healthcare services at home or in Malaysia and Thailand, after consultation in Singapore.
Outlook
While half of the space would be catered to for capacity expansion, the remaining unutilized space would be leased to Food & Beverage and healthcare-related tenants.
While we earmarked three years before each hospital to break even, we are upbeat on the potential growth that these new hospitals in China would bring to the Group. Notwithstanding that these hospitals are at least the size of RafflesHospital plus RafflesHospital Extension, the potential client base is also larger. Singapore’s population was at 5.6mn as compared to Chongqing’s 36.7mn and Shanghai’s 24.15mn. Having said the above, a slowdown in China could lead to a longer time to break even for the new hospitals and clinics.
Downgraded to ‘Neutral’ with a lower TP of S$1.27 (previously $1.49)
We adjusted FY17e Revenue/PATMI lower by 8%/6% on (i) slower patient volume growth due to macro headwinds; and (ii) higher operating costs. Re-rating catalysts: (i) Better than expected performance in China hospitals; and (ii) Successful restructuring and integration of MCH.
Figure 1: Peers Comparison
Raffles Medical Group is currently trading at 33.8x forward PER, which is comparable its regional peers’ average of 34.9x.
It’s FY17e dividend yield of 1.6% is also on par with its regional peers’ average.
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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.
