Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-06-05: Solid Foundation And Good Long-Term Potential

Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-06-05: Solid Foundation And Good Long-Term Potential RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Solid Foundation And Good Long-Term Potential


Integrated healthcare player with good track record 

  • Raffles Medical is a proxy to the Singapore’s healthcare sector and its expansion in China provides exposure to the underdeveloped private healthcare market. It is Singapore's leading integrated healthcare provider, with a robust track record and exciting development plans of two hospitals in China. 
  • Local expansion should support short-term growth, while China expansion should drive medium-term growth.
  • Maintain BUY, but TP is reduced by 8% to SGD1.54 after accounting for greater expansion risks in China.


Steady base in Singapore and good potential in China 

  • Singapore market, which still contributes the majority of earnings, should remain stable. The weakness from medical tourism could be temporary, as patients deferring treatments due to weak economy, could return. Also, demand from local patients could improve as the economy recovers. 
  • For China expansion, both Shanghai and Chongqing Hospitals could lift growth in the mid to long term. We expect both hospitals to turn profitable in 2020, the second full year of operation. However, we caution that start-up costs in 2018 and initial operating losses in 2019 will drag earnings.


Key risks: execution, start-up costs, medical tourism 

  1. Higher execution risks for Shanghai and Chongqing hospitals, its first outside Singapore; 
  2. higher-than-expected start-up costs in major expansion markets such as China; and 
  3. a structural decline of medical tourism in Singapore.


Valuation basis 

  • Our DCF-based TP is SGD1.54 (WACC 7.1%, LTG 1.5%). The Singapore operation is valued at SGD1.18, while the value of the upcoming Chongqing and Shanghai hospitals are a combined SGD0.36. 
  • We find the shares undervalued, trading at 34x FY17 P/E. In our view, the current stock price largely reflects just the Singapore operation and has yet to fully account for the new hospitals in China.


Swing Factors


Upside

  • Further progress on more hospitals in China, which could be in other top cities. Shenzhen hospital first announced in Feb 2013.
  • Faster-than-expected breakeven for Singapore expansion.
  • Normal breakeven period is one year.
  • Medical tourism in Singapore could recover from 2015 weakness as RFMD is constantly seeking new source markets.

Downside

  • 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.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-05
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.54 Down 1.670



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