Raffles Medical - DBS Research 2016-04-26: Reasonable start to 2016

RAFFLES MEDICAL GROUP LTD R01.SI

Raffles Medical - Reasonable start to 2016

1Q16 revenue boosted by recent acquisition; net profit within expectations, registering 3.7% growth
Robust top-line growth driven by recent acquisition, higher patient load and revenue intensity; margins dipped on higher costs
Maintain HOLD, TP S$4.30.

Raffles Medical’s 1Q16 net profit registered a growth of 3.7% to S$15.5m, while revenue grew by 23% y-o-y to S$116.9m.
The strong growth in revenue was equally helped by recent acquisitions, as well as contributions from its Healthcare Services and Hospital Services divisions.
Top-line growth was driven by both divisions with Healthcare Services and Hospital Services divisions registering 36.3% and 15.2% respectively.
Hospital Services revenue growth was contributed evenly by higher patient volumes and revenue intensity. Management also shared that foreign patient volumes still registered growth.

Excluding the recently acquired International SOS (MC Holdings) Pte Ltd and its subsidiaries (MCH), the Group’s revenue would have been at S$106m, registering a growth of 11.6%.
MCH’s revenue is estimated to be at S$10.9m and register a minor operating loss of S$0.32m. Excluding MCH, the Group’s operating profit growth would have been at 7.8% instead of 6%.

EBIT margins dipped by 260bps to 16% in 1Q16, from the same period a year earlier. This arose from the consolidation of MCH and higher costs in relation to projects undertaken by the Group, for instance Raffles Holland V and the newly established medical centre at Shaw Centre.
We believe margins should progressively improve over the course of the year. Management indicated that the medical centre at Shaw Centre was still registering losses (though this has narrowed) and opines that it could turn profitable by 3Q16.

Raffles Holland V has obtained its TOP in March, and the fitting-out period for tenants that have signed is currently underway. The development is expected to be opened for business in June 2016, while leasing activities and discussions with potential tenants are still ongoing.
The Raffles Hospital extension is progressing according to schedule and is set to be completed by mid-2017. However, we note that its Shanghai Hospital’s completion is now projected to be in late 2018, instead of mid-2018 as was previously expected.

The proposed share split announced during its 4Q15/FY15 results back in Feb’16 has been approved by shareholders, and will be effective from 11 May 2016.
Our TP will be adjusted accordingly from then. There will be no impact on our EPS growth estimates or valuation arising from this exercise.

1Q16 results post no major surprises and are within our expectations.
We are projecting a core net profit growth of about 5% for FY16F, but this is lower than consensus’ mean expectations of c.10% growth.
Management still expects to register growth but noted the “measured pace of growth” may have an effect on healthcare demand.
Based on 1Q16 results, we believe the Group is still on track to meet our full-year expectations.

We maintain our HOLD recommendation with an unchanged TP of S$4.30.
While we like the Group’s relatively resilient model and its exposure to the healthcare sector, we believe its current valuation at 36.5x/34.5x FY16F/17F PE has largely priced in the 36.5x/34.5x positive attributes.
Moreover, growth is projected to be below historical average trend from FY16F-18F on the back of the macroeconomic headwinds and start-up costs for its expansion projects being undertaken.
Upside risks to our recommendation lies in further accretive acquisitions and/or JVs/strategic alliances for entry into new markets.

Andy SIM DBS Vickers | http://www.dbsvickers.com/ 2016-04-26

DBS Vickers SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.30 Same 4.30