Raffles Medical Group - CIMB Research 2017-10-30: 3Q17 Healthy Patient Volume

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - 3Q17: Healthy Patient Volume

Raffles Medical Group (RFMD)'s 9M17 core net profit formed 70% of both our and Bloomberg consensus full-year numbers, deemed in line as 4Q is seasonally stronger.
Slight uptick in hospital services in 3Q (+3.1% yoy) led by rising local patient load, but flat medical tourism. Healthcare services down 4.2% yoy on lower insurance income.

Hospital extension on track for 4Q17F opening, with projected rental contribution from 2H18F onwards; ISOS was EBITDA positive in 3Q17.
More visibility on Chongqing start-up costs. We agree with management’s 3-year EBITDA breakeven period and believe such gestation costs are largely priced-in.
Maintain Add on this long-term healthcare play with a higher SOP-based TP.

Raffles Medical Group (RFMD) reported flat 3Q17 topline of S$119.6m, as the slight growth of hospital services (+3.1% yoy) mitigated a 4.2% yoy decline in healthcare services. Staff costs, the largest component of operating expenses, grew 2.1% yoy on the back of wage increment while headcount was largely unchanged.
A lower tax rate due to one-off utilisation of tax losses and incentive boosted 3Q17 overall core net profit (+1.0% yoy), which we deem in line with our and Bloomberg consensus full-year numbers as 4Q is seasonally stronger.

We continue to see strength in domestic patient load, thanks for RFMD’s continual focus on curative illnesses, which drove the 3.1% yoy growth in hospital services. The group also recorded steady foreign patient volume and average bill intensity in 3Q17. For the healthcare segment, we saw low single-digit revenue growth of general practitioner (GP) services on the back of new clinics, but there was S$1m-2m loss from the insurance business, because of lower renewal of international healthcare plans for expats.

The Raffles Hospital extension is on track to open in 4Q17, with estimated 60% space for own use and balance 40% to be leased out for commercial purposes; we expect rental income in 2H18F. Management also intends to open another 50-100 beds over the next two years at the existing building.
Meanwhile, 55%-owned International SOS (MC Holdings) has attained EBITDA positive, but continues to record net losses in 3Q17 on the back of synergising and attrition costs. We forecast a turnaround in FY19F.

Given Chongqing hospital’s integrated offering of multiple specialist disciplines, opening of hospital beds in phases and gradual hiring of 120 doctors (well-split between local/foreign), we believe it should achieve EBITDA positive in its 3rd year of operations.
Recall that the group’s existing hospital in Singapore took 11 months and two years to break even on the EBITDA and net level, respectively. We forecast S$6m-13m EBITDA loss p.a. over FY18-20F for Chongqing, slightly above management’s guidance.

As we adjust for slower healthcare services growth, higher depreciation expenses from the hospital extension and an enlarged share base, our FY17-18F EPS fall by 1.4-3.5%.
Our FY19F EPS is now 2.3% higher to reflect lower gestation costs for Chongqing hospital, resulting in our SOP-based TP rising to S$1.24. We maintain our Add rating on this longer-term healthcare play with exposure to the growing China market.
Key downside risk to our call is poor execution of its overseas hospital expansion.

NGOH Yi Sin CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-10-30

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.24 Up 1.210