Raffles Medical Group - UOB Kay Hian 2016-02-23: 2015 No Surprises; Look Forward To Better Momentum In 2016

RAFFLES MEDICAL GROUP LTD R01.SI

Raffles Medical Group (RFMD SP) 2015: No Surprises; Look Forward To Better Momentum In 2016

2015 results were in line with our and market expectations.
2015 net profit growth (2.4% yoy) was lacklustre as operating margins fell 1.8ppt to 19.6% on staff costs.
A slight positive was its final DPS of 4.5 S cents/share, which exceeded our estimate.

We maintain our estimates and BUY rating, with a DCF-based target price of S$5.07 as its capacity expansion will provide a runway for growth in the next 5-10 years.

There were no surprises as Raffles Medical Group’s (RMG) 2015 results came in within our and market expectations.
2015 net profit of S$69.3m grew 2.4% yoy, but growth would have been 4.9% yoy excluding fair value gains on investment properties. The lacklustre growth was due to a 1.8ppt dip in operating margins to 19.6% on higher operating costs.
A pleasant surprise came from its final dividend of 4.5 S cents/share, which brought total DPS to 6.0 S cents/share (+9% yoy), vs our 5.5 S cents/share forecast.
The group also announced a share split on a 3-for- 1 basis.

2015 operating margins dipped 1.8ppt to 19.6%. Cost pressure remains an issue as key components such as staff costs grew 11.8% yoy, which exceeded turnover growth of 9.6% yoy.
The higher staff cost was attributable to new hires for its expanded operations at Raffles Hospital, Raffles Medical Orchard and acquisitions of new subsidiaries in 2015.
The increase in depreciation (+32% yoy) and lease cost (+29% yoy) was mainly due to new and expanded operations at Raffles Hospital and the newlyopened Raffles Medical Centre Orchard (Shaw Centre) in Jun 15.

Staff costs are expected to remain elevated ahead of the group’s expansion plans given the lead time (of up to 1-2 years) needed to train new staff.
For its new hospital in Shanghai, management plans to have at least 100 doctors/specialists when it opens. Against this background, we estimate that staff costs as a percentage of revenue are likely to be slightly over 50% from 2016 onwards. However, contributions from new facilities such as its medical centres at Shaw Centre and Holland V medical centre (1Q16) may need time to ramp up and may typically need at least one year to break even.
Other than new hires, wage pressure for nurses remains high given the global shortage of nurses and higher pay for government nurses.

Raffles Holland V is expected to be completed (with temporary occupation permit) at end-February and subsequently fitted out for operations in May 16.
As for its new China JV, foundation works have commenced and the targeted completion of its new hospital is 1H18.
Work on the extension of its hospital in Singapore is progressing well and is targeted for completion in 2Q/3Q17.

The group's cash balance declined from S$150.2m to S$86.1m (S$0.09/share) as at Dec 15 due to capital expenditures for its Raffles Hospital extension, payment of interim dividends (1H15) as well as the construction of Raffles Holland V. Its cash flow generation remains strong, with circa S73$m net cash from operations generated in 2015.
In terms of investments for its China hospital, the total cost is Rmb800m, and for RMG’s 70% share, the group is considering several options including a bond issue.

We tweak our 2016-17 net profit forecasts downwards by 6-7% to account for higher depreciation, operating lease expenses and staff costs.
We also introduce our 2018 forecasts. On our latest estimates, RMG is projected to deliver a 3-year EPS CAGR of 13.3% (2016- 18).

We are positive on its long-term prospects.
We have a DCF-based target price of S$5.07. At our target price, the implied 2016F PE is 33.7x. This is slightly more than its +1SD to mean PE of 30.8x, which is not cheap but deserved, as its 2016-18F ROE of 11.7-14.3% compares with its long-term average ROE of 11.6% since 1997.
Also, we think its new capacity in China and Singapore will provide RMG growth capacity for the next 5-10 years.

We see potential catalysts from:
1. better-than-expected 2016-17 earnings,
2. rising dividends, and
3. more accretive new investments in China or M&As.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-23

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 5.07 Up 5.05