Raffles Medical - DBS Research 2016-02-23: Valuation pricing in long-term growth

SGinvestors.io

RAFFLES MEDICAL GROUP LTD R01.SI 

Raffles Medical - Valuation pricing in long-term growth 

• FY15 results in line; 10% revenue growth offset by margin compression 
• Final DPS of 6 Scts proposed (vs 5.5 Scts in FY14) 
• Proposed 1-to-3 share split to improve liquidity 
• Maintain HOLD. TP revised to S$4.30 

Maintain HOLD, TP revised to S$4.30. 

• We maintain our HOLD recommendation for Raffles Medical with TP of S$4.30 (including potential value of its Shanghai JV hospital). 
• At its current valuation of 33x FY16F PE, the counter has reflected its growth potential, in our view. 
• We project growth over the next few years to be a tad slower than its historical average on the back of investment and gestation period for its projects currently ongoing – Raffles Hospital extension, Shanghai Hospital. 

FY15 results in line; 10% revenue growth offset by margin compression. 

• FY15 net profit grew by a muted 2%, arising from margin compression of 1.8ppt largely due to higher staff costs, lease expenses, and inventories and consumables. 
• A final DPS of 4.5 Scts was proposed, making FY15 DPS at 6 Scts (vs 5.5 Scts in FY14). 
• In addition, Raffles Medical has proposed a 1-to-3 share split to increase accessibility to potential investors and improve liquidity and trading. This is subject to shareholders’ approval. 

Slower growth in the immediate horizon. 

• The Group has embarked on an expansion phase with several projects in progress locally and overseas. While this should provide it with a growth trajectory over the long term, we expect a period of gestation and forecast a 3-year CAGR growth of 7%, significantly slower vis-à-vis the 19% rate in the last decade. 
• We lowered our FY16F/17F forecasts by 4% to 6% on the back of lower margins. 

Valuation: 

• We lowered our TP to S$4.30 (from S$4.34) on the back of marginally lower forecasts but roll our valuations (29x) to average of FY16F/17F earnings. 
• Our TP includes S$0.49/share from our estimated value of its Shanghai greenfield hospital. 

Key Risks to Our View: 

• Economic slowdown. 
• While healthcare is considered a defensive sector, private healthcare will nonetheless be impacted by a slowdown in the economy since elective procedures can be deferred or patients can choose public hospitals as a lower cost alternative.

Andy SIM DBS Vickers | http://www.dbsvickers.com/ 2016-02-23

DBS Vickers SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.30 Down 4.34