RHB Research 2015-07-28: Raffles Medical Group - Building up for growth. Maintain BUY.

Building up for growth

  • 2Q15 results were slightly below expectations, mainly due to higher operating expenses ahead of new facilities. 
  • Net profit came in at SGD15.9m, which is up 2.2% YoY. 
  • We expect improvements in 2H15 and remain optimistic on its long-term growth prospects, especially its Shanghai hospital project. 
  • Maintain BUY with a DCF-based TP of SGD5.50/share (11% upside). 

 Slower topline growth this year expected. 

  • Revenue was up 7.2% YoY, driven by both healthcare services and hospital. 
  • Hospital revenue grew 6.6% YoY, mostly due to higher volumes.
  • 1H15 revenue growth of 7.8% YoY is mostly driven by domestic patient numbers, as foreign patient load slowed. 
  • Management attributed this to the poor economic environment in Asia this year and lower oil prices. 
  • Patient load from Indonesia, Middle-East and Russia, which are amongst the bigger foreign markets for Raffles Medical has been lower than expected. 

 2H15 should see some pickup in both sales and margins. 

  • We expect growth to pick up in 2H, as its new Medical Centre at Shaw opened in June. 
  • We believe part of the higher operating costs can be attributed to higher depreciation from new equipment purchases and the hiring of staff ahead of opening. 
  • New Medical Centre also remains on track to open in Holland Village in 2016. 

 Shanghai project being finalized. 

  • Management is currently finalizing the details with its JV partner for the Shanghai project. 
  • As part of the country plan, the company will be setting up its 2nd and 3 rd clinic in the city in 2016 and 2017 respectively, as well as taking in more staff from China, with the aim of training them in Singapore before eventual relocation to its China operations. 
  • We believe this may increase costs risk, but is necessary for long-term growth strategy. 

 Maintain BUY. 

  • We trim our forecasts by 2-4%, but maintained our BUY call, with a DCF-derived TP of SGD5.50 (previously SGD5.60), valuing the company at 24.5x FY16F EV/EBITDA. 
  • We believe its high valuation multiples is justifiable by the long-term growth prospect and its healthy balance sheet.

(James Koh)

Source: http://www.rhbgroup.com/