Raffles Medical Group - RHB Invest 2017-08-01: Bear For A Couple More Years


Raffles Medical Group - RHB Invest 2017-08-01: Bear For A Couple More Years RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Bear For A Couple More Years

  • Post analyst briefing, we understand from management that its hospitals in China would likely take three years to reach a positive EBITDA. 
  • We now turn bearish on Raffles Medical as near-term growth is mainly supported by rental income instead of organic growth; therefore we think there is a lack of an upside catalyst in the near term. 
  • Downgrade to SELL with a DCF-derived TP SGD1.10 (from SGD1.49) implying 14% downside.



Near term growth supported by rental income rather than organic growth.

  • We believe the current valuation for Raffles Medical is high given that the Singapore healthcare scene continues to face slowdown in demand. Holland V medical centre was fully let out by 2Q17. Yet, despite a rental income booster from Holland V, revenue from healthcare services still fell by 1.1% in 2Q, implying a stronger decline in core revenue.
  • On the hospital services side, revenue grew marginally at 0.3% in 2Q However, management cited that some of the foreign patients who came for diagnosis could not afford the treatment, leading to a single digit percentage decline in inpatient numbers. We think there might be a structural decline in inpatient load moving forward if the economic outlook in the region remains weak. 
  • Henceforth, while we expect an uplift in FY18F revenue driven by the hospital extension (open in 4Q17), we think most of it is still coming from rental income as 50% of the new space would be let out.


Bear for a couple more years before China delivers. 

  • Chongqing hospital and Shanghai hospital would probably begin their operations in 2H18F and 2H19F respectively. Management cited that a typical Chinese hospital would need three years to reach a positive EBITDA but losses should not wipe out 30-40% of the group’s profit. 
  • Previously, we had used the average operational cost of existing listed Chinese hospitals as a gauge for Raffles Medical potential start- up expenses. Given the new guidance from management, we think the “blue sky” scenario presented in our previous report from 25 April is too optimistic: Raffles Medical Group : Near-Term Headwinds.


Change in forecast 

  • Change in forecast as we now project each hospital in China to generate an operating loss of about SGD10m and SGD14m for its first two years of operations. 
  • We now incorporated the estimated results from the Chinese hospitals into our model. Together with a slower growth in domestic healthcare demand, we reduced our FY17-19F PATMI by 4%, 22% and 26% respectively.


Downgrade to SELL with a DCF-derived TP SGD1.10 (from SGD1.49). 

  • We downgrade as we think that the current valuation of 32x FY18F P/E is too high given that:
  • Downgrade to SELL with a DCF-derived TP SGD1.10 (from SGD1.49). We downgrade as we think that the current valuation of 32x FY18F P/E is too high given that: 
    1. Near-term earnings support is coming from non-core rental income; 
    2. Domestic healthcare demand is likely to see structural decline; 
    3. Start-up costs from the Chinese hospitals venture are going to be a drag especially in the first two years.




Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-01
RHB Invest SGX Stock Analyst Report SELL Downgrade NEUTRAL 1.10 Down 1.490



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