Raffles Medical Group (RFMD SP) - Building sustainable growth
Results in line; TP lowered 8% due to higher costs
- FY16 results were in line; earnings met 95% of our forecast and 98% of consensus.
- Core earnings grew 1% or 6-7% YoY if excluding the drag from newly acquired subsidiary, MCH.
- Revenue grew 15% YoY (7.5% excluding MCH); healthcare and hospital revenue rose 31% and 6% YoY, respectively.
- Various expansions will continue to sustain growth:
- c.50% of the floor space of the upcoming Raffles Hospital extension will be used to grow various specialties;
- three new clinics will be opened in China; and
- exploration of more M&A opportunities at attractive valuations amid the weaker economy.
- We cut our FY17-18E EPS by 8-10% for higher start-up costs ahead of Raffles Hospital’s extension. Maintain BUY with DCF-based TP reduced 8% to SGD1.70.
MCH integration will take time but remains priority
- Restructuring costs for MCH, acquired in 4Q15, continued to drag earnings.
- Management expects progressive improvement and has placed a high priority on the integration. To accelerate the process, the country head has been appointed to spearhead the operations in China and Indochina.
- Raffles’ operations in Cambodia and several clinics in China are improving. In the future, MCH plans to set up more clinics overseas.
Singapore operations remain healthy
- Medical Centre in Holland Village reached break even in Dec 2016, while several divisions in the Orchard Medical Centre have also broken even.
- The extension of Raffles Hospital is expected to be completed in 4Q17; the new building will enable an expansion of various key specialties. This will free up space for the existing building to increase the number of beds.
- Management targets to use 50% of the floor area and rent out the remaining new space.
Positive on China expansion
- Construction of its Shanghai hospital is progressing well; three new clinics will be opened in China before the hospital starts in 2019 to expand the referral network and branding.
- Key challenges are regulations and ability to attract skilled doctors.
- With a track record of recruiting and managing c.80 doctors overseas, out of 380 in total, management is confident in its ability to attract more capable doctors.
- Further progress in second hospital in China, which could be in Shenzhen or other top cities. Shenzhen hospital first announced in Feb 2013.
- Faster-than-expected breakeven for Singapore expansion.
- Normal breakeven is one year.
- Medical tourism in Singapore could recover from 2015 weakness as RFMD is constantly seeking new source markets.
- Execution risks for Shanghai hospital, its first outside Singapore.
- Higher-than-expected start-up costs in major expansion markets such as China.
- Structural decline of medical tourism in Singapore.