UOB Kay Hian 2015-07-28: Raffles Medical Group - 1H15: Lacklustre Results; Downgrade To HOLD On Price Strength.

1H15: Lacklustre Results; Downgrade To HOLD On Price Strength 


  • RMG’s 1H15 results were lacklustre, with net profit rising only 3% yoy on cost pressure, particularly in staff costs. 
  • While we remain long-term bullish on its promising expansion plans, its near-term outlook will be clouded by cost pressure. 
  • Downgrade to HOLD with a revised target price of S$5.05. 
  • Entry price: S$4.60. 


RESULTS 


• Weak 1H15, cost pressure remains. 

  • Raffles Medical’s (RMG) 1H15 net profit of S$30.9m (+3% yoy) came in below our and market expectations. Compared with our fullyear estimate, 1H15 accounted for only 42% of our projection. 
  • While 1H15’s turnover grew at a respectable 8% yoy, net profit only rose 3% as a continued rise in operating costs led to a 1ppt fall in operating margins to 19.0%. 
  • The main culprit was staff costs, which grew 12% yoy, exceeding top-line growth of 8% yoy. 
  • This is attributable to new hirings for the new and expanded operations at Raffles Hospital and medical centres at Shaw Centre, Orchard (which opened in Jun 15). 
  • An interim dividend of 1.5 S cents/share (unchanged) was announced. 

• Reasonable growth from healthcare and hospital segment. 

  • Both the healthcare and hospital segments registered decent 2Q15 turnover growth of 5.7% yoy and 6.6% yoy respectively. 
  • The latter was a pleasant surprise as there were concerns on the admission of foreign patients given the headwinds of moderating economic growth and the strong Singapore dollar. 
  • However, RMG’s diversified base of foreign patients is paying off. 
  • We understand that out of the 6.6% rise in the hospital’s 2Q15 revenue, 2% came on the back of higher pricing and the remainder from higher patient admissions. 


ESSENTIALS 


 Elevated staff costs ahead of expansion plans. 

  • We believe staff costs will remain elevated ahead of the group’s expansion plans given the lead time (of up to 1-2 years) needed to train and assimilate new hires. 
  • As a result, we estimate staff costs as a percentage of revenue is likely to remain closer to 50%. 
  • However, contributions from new facilities such as its medical centres at Shaw Centre (soft opening in Jun 15) and Holland V medical centre (1Q16) may need time to ramp up. 
  • In addition, the group will have to continue hiring ahead of new openings of its medical centre at Holland V and the new extension at its flagship hospital. 

 Slight delay in hospital extension and other expansion updates. 

  • During the analyst briefing, management guided that the completion of the hospital extension wing at its flagship hospital could be delayed to 2Q17 rather than 1Q17. The slight delay is due to piling issues but this is not a concern. 
  • As for its new China JV, the group is in the midst of securing all relevant approvals soon. The targeted completion of its new China hospital is in 1H18. 
  • In addition, management also plans to open one new medical centre in Shanghai every year ahead of 2018 to expand its presence there. 
  • The plan is for these medical centres to feed patients to its newly completed hospital in 2018. This strategy has proven to have worked before and we are confident of RMG’s ability to execute as the group has been operating in Shanghai for more than four years. 

 Strong balance sheet. 

  • RMG had a net cash balance of S$112m (S$0.20/share) as at Jun 15. 
  • The group is reviewing its funding option for its China JV. 


EARNINGS REVISION/RISK 


 Trimming earnings on elevated costs. 

  • We cut 2015-17 forecasts by 4-8% to factor in higher staff costs ahead of its new capacity increase and depreciation. 
  • On our latest assumptions, the group is expected to register a 3-year net profit CAGR of 14% (2015- 17F). 
  • This could accelerate from 2018 onwards upon the completion of its new China hospital, which has a 400-bed capacity. 


VALUATION/RECOMMENDATION 


 Downgrade to HOLD after the recent strong share price performance. 


  • While we remain confident of its long-term prospects and its good execution track record, we downgrade our rating to HOLD from BUY after the 23% ytd rise in share price. 
  • We have a DCF-based target price of S$5.05 (previously S$4.70), with the increase due to a higher terminal growth assumption of 2.5% compared with 2% previously to reflect better growth visibility from China. 
  • At our target price, the implied 2016F PE is 36.3x, which is slightly more than its +2SD to mean PE of 24.0x which implies the market is factoring in the premium for its long-term expansion into China. 


SHARE PRICE CATALYST 


 We see potential catalysts from: 

  1. better-than-expected 2015-16 earnings, 
  2. rising dividends, and 
  3. accretive new investments in China or M&A. 


(Andrew Chow, CFA)

Source: http://research.uobkayhian.com/



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