Raffles Medical Group - CIMB Research 2015-10-26: Hospital growth driven by higher intensity

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RAFFLES MEDICAL GROUP LTD R01.SI 

Raffles Medical Group - Hospital growth driven by higher intensity 

• 11.7% yoy hospital growth was driven by higher patient intensity (2/3) and domestic volumes (1/3). Higher average patient bill size likely to stay. 
• Mitigating this was RFMD seeing a decline in medical tourists for the first time. 
• Earnings miss came from expansion plans dragging down margins. 9M15 formed 66% of our FY15F (below historical average of 70%). 
• Upgrade to Hold after recent share price correction and as we roll forward to CY17. 

Hospital growth (+11.7%) mostly driven by patient intensity 

• Management revealed that most of the growth was driven by higher patient intensity (~2/3), and increased domestic patient volumes (~1/3). The positive read-through is that RFMD’s average patient bill size will likely remain at this higher price point, given that management attributed 3Q’s higher intensity to its recently expanded bone marrow specialist centre (upon conversion of previously leased space), meaning RFMD’s current mix of higher intensity specialist offerings should yield higher average bill sizes. 

First ever negative growth in medical tourists 

• In our first take, we were surprised by the hospital growth given our weak medical tourism expectation. In fact, management said this was the first quarter where it saw a decline in foreign patients (c.-5% yoy), primarily from Indonesia and Russia. We believe the decline came from the middle/upper-middle class, and given the poor consumer sentiment and weak regional currencies, we see no near-term reprieve (we estimate foreign patients make up the lower end of its historical 30-35% of total patients). 

Earnings miss came from OP margins; likely to remain weak 

• 3Q15 OP margins fell to 18.2% (2Q15: 19.3%; 3Q14: 19.2%). The drag on margins came from 
  1. higher depreciation (from conversion of previously-leased space) and 
  2. operating leases (mostly from its 17.5k sf Shaw Centre). 
• Near-term pressure exists from 
  1. Holland Village (1Q16) and 
  2. the hospital extension (1H17), 
  though we think margins will improve in the long run after the group ramps up operating leverage, especially as hospital services enjoy higher OP margins (~25% vs. healthcare’s ~9%). 

Minimal financial contribution from recent developments 

• Recent developments including 
  1. 5.4k sf medical centre in Osaka (effective stake 40.8%) and 
  2. US$24.5m International SOS acquisition (55% stake) 
  increases brand awareness and clinic presence in the region, but we do not expect any meaningful financial contribution. 

EPS cut on lower margins 

• We cut FY15-17F EPS by 6-11% to factor in margin pressure from its expansion plans. Our FY16-17F assumes 10-15% growth in its hospital and healthcare business with EBITDA margins similar to FY15’s level. 
• The stock is down c.11% since our downgrade in Jul. 
• We upgrade to Hold as we roll forward to CY17, with our SOP-based target price valuing its Singapore business at 21.5x CY17 EV/EBITDA, above peers’ 19.7x and slightly above its historical average of 21x to factor in growth from its hospital extension.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-26

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