Raffles Medical Group - CIMB Research 2016-07-25: Results missed on cost pressures

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Results missed on cost pressures

2Q16 net profit was 10-15% below our and Bloomberg consensus expectations as cost pressures chewed on margins. 1H formed 43% of our FY16 forecast.
Hospital growth (+7.9% yoy) retraced sequentially. Growth was evenly split between volume and price.
ISOS and Shaw were still loss-making. 2Q’s OP margin (16.8%) was some way below FY14-15’s 20-21%.
Holland V is off to a rocky start, with committed occupancy below expectations at 60%.

We think the attention on results should be on margin compression and the ramp-up of expansion plans. Sales growth was lukewarm and was only boosted by newly acquired ISOS (consolidated from Oct 15).
Ex-ISOS, group revenue was +8.7% yoy. Costs (ex-ISOS) continued to creep up, with EBIT growth a slower 6.5%. Reported EBIT growth (+4.1%) was even worse due to a loss-making ISOS.
Overall, gestation of new capacity continues to hurt margins. 2Q net profit was below our expectations and Bloomberg consensus.

The hospital segment failed to follow on 1Q’s strong momentum (+15% yoy), and growth retraced to 7.9% yoy, in line with our 7-8% FY16-18F assumptions.
We understand growth was evenly split between volumes and price intensity, while domestic volumes grew stronger than foreign patient volumes.
Overall, medical tourism registered flat to small positive growth, with weakness from Indonesia/Malaysia/Russia mitigated by patients from the Indochina region and PRC.

Raffles Holland V only opened in Jun 16 and had little impact on 2Q’s top line.
From a cost perspective, we expect to see higher incremental depreciation in 3Q, although management alleviated concerns of incrementally higher staff costs given that the bulk of hiring needs were already completed.
As expected, the key concern of low occupancy rates materialised. Committed occupancy is currently 60%, which includes 20% for RMG’s own medical clinics. Rental rates were in the S$12-15 psf range.

2Q’s 16.8% OP margin did improve 0.8-ppt qoq but was down 2.5-ppt yoy. Even if we exclude ISOS and one-off rebranding costs that accounted for some of the drag, 1H16 OP margin would have been 18.4% vs. 20-21% in FY14-15.
We see further pressure from
1. a still loss-making Shaw (management expects breakeven by year-end), and
2. gestation from Holland V.

Our non-consensus Reduce call is premised on slower growth on the back of cost pressures, execution risks in China, and the stock trading above peers and its historical band. This set of results reaffirms our view on cost pressures, and we struggle to see any reprieve in sight.
We maintain our Reduce recommendation with an unchanged SOP-based target price of S$1.41.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-25

CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.41 Same 1.41