Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-04-25: 1Q17 Below Expectations, Rising Costs To Cap Near-Term Outlook

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RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 1Q17 Below Expectations, Rising Costs To Cap Near-Term Outlook

• 1Q17 net profit of S$15.5m (+0.1% yoy) came in below our expectations. 
• Revenue fell 1.7% yoy as weaker demand from foreign patients took a toll, but we think management performed well in terms of containing costs. 
• We reduce 2017-19 net profit by 9-14% to build in higher expansion costs and downgrade to HOLD with a DCF-based target price of S$1.52 (previously S$1.66). 
• Entry price: S$1.35.

RESULTS

1Q17 net profit flat, below expectation. 

• Raffles Medical Group’s (RMG) 1Q17 net profit of S$15.5m (+0.1% yoy) was below our expectations, accounting for 20% of our full-year forecast. 
• We note that historically, 1Q results typically accounted for 22-23% of our fullyear estimates.

Revenue fell short but RMG controlled costs well. 

• 1Q17 revenue declined 1.7% yoy, owing to a 2.0% and 1.9% decline in the healthcare and hospital services divisions respectively. The decline in its hospital division was largely due to softer demand from its foreign patients (volume estimated to have declined by low single digits in % terms). 
• Staff costs fell 1.0% yoy and we think this is commendable given the group's increase in hiring ahead of new capacity.

Firm operating margins. 

• Operating margins fell 0.2ppt to 15.8% in 1Q17 but this was distorted by a higher wage credit in 1Q16. 
• Excluding the wage credit in 1Q16 and 1Q17, operating margins would be 15.1% in 1QFY17 (0.7ppt higher compared with 14.4% in 1Q16). Excluding the wage credit received, the group’s operating profit would have grown by 3.8%.

Balance sheet remains resilient. 

• The group's net cash increased from S$82m (as at Dec 16) to S$89.4m (S$0.05/share) as at Mar 17 due to its strong cash generation. 
• Even with the significant investments in China, we estimate the group to revert from a net cash balance in FY16 to a manageable net gearing of 23% in FY18F.

ESSENTIALS

Updates in China. 

• The targeted completion for Raffles Chongqing is 2Q18. Similar to RMG’s hospital in Shanghai, we understand RMG will open Raffles Chongqing in phases, depending on demand. The initial plan is to open 200 beds for private healthcare and another 100 for public healthcare at Raffles Chongqing (total capacity 700 beds). The latter will likely to be priced to breakeven and will be for training purposes by RMG. 
• The investment for Raffles Chongqing will be Rmb1.0b and about two-thirds will be debt funded. As for Raffles Shanghai, the new hospital is slated for completion in end-18. Piling has been completed already.

Raffles Hospital Extension targeted for completion by 4Q17. 

• Raffles Hospital Extension’s completion in the fourth quarter will allow the hospital to further increase its breadth and depth of clinical services with projected concurrent expansion in outpatient specialist centres and inpatient facilities capacity. 
• With less than a quarter of contribution for 2017, we expect the extension to contribute meaningfully only in 2018. In addition, the rental space will also come along with an element of rental-free period for renovation and fittings.

EARNINGS REVISION/RISK

• Adjust 2017-19 earnings downwards by 9-14% to factor in: 
  1. lower top-line assumption to account for the slower inflow of medical tourists to Singapore, and 
  2. higher staff (54-55% of total revenue compared to 52% previously) and other miscellaneous cost assumptions, especially for 2018, as the group prepares for the additional expansion in China. 
• Based on our new estimates, we forecast a 3-year EPS CAGR of 11.3% (2017-19F), from 15.2% previously.

VALUATION/RECOMMENDATION

• Downgrade to HOLD with lower DCF-based target price of S$1.52 on near-term revenue headwind and upfront costs. 
• Despite our downgrade on the lack of near-term growth, the group’s runway for long-term growth will be significantly enhanced for the next 10 years. This will be from end-18 when its new hospitals in Shanghai and Chongqing are completed. 
• Our new DCF-based target price is S$1.52/share (previously S$1.66) and we would be Buyers closer to S$1.35/share.

SHARE PRICE CATALYST

• Potential catalysts, in our view, include: 
  1. more accretive new investments in China or M&As, and 
  2. smooth execution in the launch of its new hospitals in China.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-25

UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 1.52 Down 1.660