CIMB Research 2015-07-28: Raffles Medical Group - Downgrade on valuations. REDUCE.

Downgrade on valuations 

  • RMG’s 2Q15 results were below expectations. 
  • Continued weakness in the region has dampened medical tourism, with 2Q15’s revenue growth (+7.2% yoy) mostly driven by increased domestic volume. 
  • With expansion plans dragging down margins, 2Q15 earnings growth was a slower 2.2% yoy, taking 1H15 earnings to 41% of our and consensus full-year forecasts. 
  • We lower our forecasts and SOP-based target price to $4.54 (from $4.64) on slower topline growth, downgrading the stock from Hold to Reduce on valuation grounds. 
  • De-rating catalysts could come from slower than expected ramp up and further delays in expansion projects. 

More measured pace of growth 

  • We think that the more measured pace of economic growth in Singapore and the region, coupled with regional currencies weakening against the S$, will dampen healthcare demand. 
  • This was evident in 2Q15 when hospital services revenue rose by a modest 6.6% yoy, similar to the mid-single-digit growth in the past four quarters (vs. 13.7% average yoy growth in 2010-13). 
  • While hospital services slowed over the past year, healthcare services compensated with stronger-than-expected growth (12-16% yoy growth in 1Q14-1Q15), driven by a combination of 
    1. an expanding clinic network, 
    2. stronger insurance business, and 
    3. benefits from government initiatives (Community Health Assist Scheme and Pioneer Generation packages). 
  • However, healthcare services revenue has also slowed, growing at a more measured 5.7% yoy in 2Q15. 

Margins affected by expansion plans, but improving qoq 

  • Due to the group’s expansion plans (Holland V and hospital extension), coupled with its recent ~17.5k sf Shaw Centre opening in Jun 15, RMG’s 2Q15 EBIT margins were down slightly at 19.3% (2Q14: 20.2%, 1Q15: 18.6%). 
  • But we note the qoq improvement and believe that staff costs will begin to stabilise and margins will improve as RMG ramps up operating leverage. 
  • Trading above peers despite slower growth RMG is trading at 29x CY15 EV/EBITDA, above its peer average of 25x and historical mean of 19x (IHH is trading at 22.6x, with 3-yr EPS CAGR of 21% vs. RMG’s 10%). 
  • Even after accounting for the positives from its Shanghai hospital, we think its current valuations are not justified. 
  • The hospital extension has also been delayed from 1Q17 to 2Q17 due to construction issues.

(Kenneth NG, CFA; Jonathan SEOW)