Raffles Medical Group Ltd - Phillip Securities 2016-02-23: All About Integration and Synergy

RAFFLES MEDICAL GROUP LTD R01.SI

Raffles Medical Group Ltd - All About Integration and Synergy

Growth story remains intact and expansion on track. Adjusted PATMI grew 4.9% despite challenging environment. Raffles Holland V is expected to jumpstart in 1Q16.
Post-acquisition challenges. Successful integration of the new subsidiaries and provision of complementary services could create synergies and enhance margin.

Reaffirmed Buy rating with revised TP of S$4.88 on strong positive growth outlook.

RMG’s FY15 revenue grew 9.6% yoy, supported by:
1. a. Healthcare Services division – the newly acquired International SOS (MC Holdings) Pte Ltd and its subsidiaries (MCH), the expanded network clinics coverage, as well as growing corporate client portfolio in insurance services; and
2. b. Hospital Services division – higher contribution from more specialist consultants, increased patient load and greater patient acuity.

The management shared that MCH contributed c.2.5pp of its 9.6% top line growth, despite only incorporated since mid Oct-15. FY2016 would see a full-year contribution from MCH.
On the other hand, the newly opened RafflesMedicalCentre Orchard is still under gestation period.

The management also acknowledged MCH’s higher than Group’s average staff costs. It aims to gradually manage MCH’s staff costs downwards and increase productivity as part of its integration plan. If successful, EBITDA margin should improve.
In addition, MCH which specializes in primary and secondary healthcare bode well with the Group. The new subsidiaries extend the Group’s presence in China, Vietnam and Cambodia, expanding its patient base which could be referred to the RafflesHospital (in Singapore and soon, Shanghai), as well as developing a compelling value proposition.

The management shared that the building is up for TOP inspection this month (Feb-16), and should be ready to commence business in 2Q16.
Meanwhile, both the Raffles Hospital Extension and the Shanghai New Bund International Hospital projects should be able to complete as planned, i.e. at 2017 and 2018, respectively.

A multi-disciplinary centre at Waterway Point was opened in Jan-16. The new clinic could also ride on to the growth momentum from government initiated schemes like the Community Health Assist Scheme (CHAS) and the Pioneer Generation (PG) package.

Under the Proposal, each ordinary share in the capital of the Group will be split into three ordinary shares, giving a total of 1.73 bn issued sub-divided shares after execution. The move is to enhance affordability and accessibility to both existing and potential investors, thus potentially increase both shareholder base and volume.

Pressure on margins but operating cash flow remains strong. Although we expect higher staff costs to continue to weigh on its EBITDA margins, its strong net cash balances (S$54 mn as at 31 Dec-15) and continual positive operating cash flow generated from its various business units, should provide sufficient funding for the domestic expansion (Raffles Holland V and RafflesHostpital Extension).
The remaining CAPEX for these investments amounted to S$179.8 mn, and will be spread across the next 18 months.

Although FY16E earnings was revised slightly lower to reflect the lower EBITDA margin and change of revenue mix, we reaffirmed our Buy rating with a slightly higher TP to S$4.88 from S$4.74 (or TP of S$1.60 upon completion of proposed share split) on the back of strong positive growth outlook.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-02-23

Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 4.88 Up 4.74