Raffles Medical Group - CIMB Research 2016-04-25: Revenue ahead, but still outweighed by costs

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RAFFLES MEDICAL GROUP LTD R01.SI 

Raffles Medical Group - Revenue ahead, but still outweighed by costs 

• Raffles Medical Group’s results were in line. 1Q16’s net profit edged up a modest 3.7% yoy to S$15.5m as rising costs continue to negate sales growth (+23% yoy). 
• ISOS acquisition accounted for half of the group’s topline growth, but is still making small losses (as is Shaw Centre). Ex-ISOS, group OP rose 7.8% yoy. 
• Maintain Reduce. Expect more cost pressures. De-rating catalysts include delays. 

Strong sales contribution from ISOS, but ISOS still loss-making 

• Propelled by a full quarter’s contribution from ISOS, 1Q16 revenue rose a strong 23% yoy to S$116.9m. But increased recruitment activity and a loss-making ISOS meant 1Q’s NP increased at a much slower 3.7% yoy. 
• No surprises on margin compression; 1Q’s earnings were fairly in line at 21% of our FY16 forecast and 20% of consensus’s. 
• 1Q is seasonally weaker forming an average of 22% over the past five years and Holland V should start contributing in 2H16. 
• Any contribution to earnings from ISOS is expected to be minimal for now. Ex-ISOS, group revenue would have risen a slower 11.6% yoy (vs. 23%), but operating profit growth would have been a higher 7.8% yoy (vs. 6%). This implies 1Q sales from ISOS was c.S$10.9m, with an operating loss of c.S$0.32m. This loss has no material impact to the group. Also recall that the group’s effective stake in ISOS is only 55%. 

Healthcare services growth +7.2% yoy without ISOS 

• Healthcare services surged 36.3% yoy, driven mostly by ISOS. We understand ISOS currently only serves expats and the strategy is to further integrate the ISOS clinics and widen its patient pool. 
• Management also cited added GP consultation rooms in Singapore and its growing portfolio of corporate clients as growth drivers. 

Hospital growth beat expectations 

• Perhaps the brightest spot in this set of results was hospital services’ strong sales growth (+15.2% yoy). This came ahead of expectations as this is the part of the business where its pace of growth has been slowing since FY13, partly due to slowing medical tourism. 
• Hospital growth was evenly split between volumes and price intensity. Management hinted at caution on the sustainability of volume growth. 

Expect weaker margins for the next few years 

• Topline improvement is being negated by growing costs, with staff cost being the biggest pressure. 
• Shaw Centre is still loss-making (-S$0.5m in 1Q) and the consolidation of the loss-making ISOS certainly does not help. 1Q16 OP margins (16.0%) are tepid and close to its 10-year low. Even if we exclude ISOS, OP margins would be 18.0%, below 1Q15’s 18.6%. 
• We think costs have yet to peak and will provide further stress upon completion of the hospital extension in 2017. 

Maintain Reduce 

• Maintain Reduce with an unchanged SOP-based target price of S$4.23. 
• We continue to see margins sliding and no signs of this improving. 
• Other de-rating catalysts include delays in expansion plans. 
• 3-for-1 share split will take effect from 11 May.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-04-25

CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 4.23 Same 4.23