Raffles Medical Group Ltd - Phillip Securities 2016-04-26: MCH spells More CH-allenges?

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RAFFLES MEDICAL GROUP LTD R01.SI 

Raffles Medical Group Ltd - MCH spells More CH-allenges? 

• MCH bumped up revenue growth but weighed on Groups’ profitability with its one-off transition costs. 
• Expansion on track. Raffles Holland V is expected to open for business in Jun-16. 
• Downgrade to Accumulate rating with TP maintained at S$4.88. 

Analyst briefing key takeaways 

Revenue grew 23.0% yoy to S$116.9mn in 1Q16

• Revenue grew 23.0% yoy to S$116.9mn in 1Q16, boosted by strong contributions from the Healthcare Services (+36.3% yoy) and Hospital Services (+15.2% yoy) divisions. The higher revenue was mainly driven by increased patient load, greater patient medical needs, higher revenue contributed more specialist consultants as well as the newly acquired International SOS (MC Holdings) Pte Ltd and its subsidiaries (collectively known as “MCH”). 
• Excluding MCH, top line would have grown by only 11.6% yoy. 

Operating profits and PATMI increased by 6.0% and 3.7% yoy in 1Q16, respectively. 

• Operating margin decreased from 18.9% in 1Q15 to 16.2% in 1Q16, mainly due to higher staff costs (acquisition of MCH and recruitment of more specialist consultants), operating lease and other operating expenses. 
• Excluding MCH, operating profit and PATMI would have increased by 7.8% and c.7% yoy, respectively. 

Rebranded MCH…Now, to increase its productivity and efficiency to enhance margins. 

• As mentioned in our last report, the main challenges post-acquisition would be integration and creating synergies thus leading to margin enhancement. The 10 clinics across 3 countries has underwent a rebranding exercise in Mar-16 to carry the Raffles Medical name. 
• The management shared that MCH remains profitable excluding the one-off transition costs. It reiterated its objective to improve MCH’s productivity and efficiency as its next stage of its integration plan. 

Repositioning MCH to expand its customer base. 

• In addition, MCH’s current business model is member-based and expat-focused. The Group plans to remodel MCH to open up its services to non-members, locals and foreigners. In particular, the MCH clinics in China, where most of its patients are expat. 
• With the change in positioning, their potential customer base could be opened up to the top 20% of China population, which are considered as the upper income group. 

RafflesMedical Centre Orchard performed better-than-expected

• RafflesMedical Centre Orchard (Shaw Centre) performed better-than-expected, opened in Jun-15 and expected to breakeven in 3Q16 – a year earlier than the initial projection of 2 years. In the latest quarter, it recorded a marginal start-up costs of less than S$0.5mn. 
• The management shared that the patients are mostly new instead of being diverted from RafflesHospital, and the demand for healthcare services is higher than the demand for hospital services, thus does not see any risk of cannibalisation. 

Raffles Holland V (obtained Temporary Occupation Permit in Mar-16, target to open in Jun- 16). 

• The management noted that the five-storey building (total gross floor area of c.65k sqft) will be branded as a commercial building. 
• RafflesMedical Centre will occupy the highest level with a total GFA of c.9k sqft, and the remaining c.56k sqft will be leased out. 
• The management also shared that, it has currently secured tenants for c.60% of the total leasable GFA and the remaining are still under negotiation. It is looking at a tenant mix which offers banking (by DBS Bank), specialty lifestyle, food and beverage, and retail services. 
• Rental rates will be based on market rate with a variable component (a percentage of total sales). 

RafflesHospital Extension (started in Dec-14, on track and target to be completed by 2017). 

• The integrated medical complex will not only support the current RafflesHospital’s range of medical specialists, healthcare training and clinical research but also offer opportunities for growth and expansion for future years. 
  1. Staggered phases to expand its core business. The 20-storey extension building with two basements will contribute an additional 220k sqft of GFA to RafflesHospital. The management shared that the percentage catered for healthcare and hospital services is not fixed and is flexible to conversion based on demand. Meanwhile, the management would start-off by leasing out unutilised space to complementary businesses or services, then slowly convert to the Group’s core businesses when demand rises. For example, service apartments for foreign patients and their families. If successful, the management would consider to replicate such model, i.e. to acquire and develop land, then partially utilised for its core operations while partially leased out. This will 
     1. ensure a steady stream of cash flows to offset its start-up costs in early years, and
     2. secure the space for future years before it gain sufficient demand to further expand.
  2. Specialist recruitment continues as the hospital ramps up capacity for the extension building. 
  3. Licensed bed capacity to increase progressively. While building up its capacity to meet the licensing requirement set by Ministry of Health, the Group also focuses on improving efficiency. The average length of stay in the Group’s hospital is now at 2.88 days compared to its targeted 4 days and public hospital’s 5.8 days (source: www.moh.gov.sg, data in 2012). 

The Shanghai New Bund International Hospital project (target to be completed by Dec- 18). 

• Some speed bumps along the road to obtain necessary approvals in China, but progress is on track. 
• On the other hand, the Group is also seeking for suitable locations to open clinics to grow patient pool which could be fed into the hospital when the hospital is due to commence business. 

Continuing its effort to refurbish and selectively expanding its network of clinics. 

• After renovating the two clinics in Ang Mo Kio and Bishan in FY15, it has recently completed upgrading works at the clinic in Toa Payoh. RafflesMedical in Toa Payoh is now opened with increased number of GP consultation rooms and additional dental services. 
• On the other hand, the multi-disciplinary centre at Waterway Point (Jan-16) is gaining traction. 
• Proposed 3:1 shares spilt expected to be executed by May-16, after obtaining approval of its shareholders at 2016 AGM in Apr-16. 

How do we view this? 

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$78.4mn as at 31 Mar-16) 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$169.2mn and will be spread to next year. 
• Slower economic growth in Singapore and the region is likely to continue in 2016 in view of persistent macro headwinds. The management shared their concern on the potential dampening effect on healthcare demand in general, in particular from the aspect of the unfavourable exchange rate. 
• Nonetheless, the diverse and comprehensive services offered, as well as the new facilities, should help to spur top line growth. 

Investment Actions 

• RMG’s 1Q16 revenue and PATMI came in at 25.4% and 21.3% of our FY16 forecasts respectively. 
• We maintain our forecasts and target price of $4.88 (or TP of S$1.60 upon completion of proposed share split) based on discounted cash flow (DCF) methodology, but downgrade our call from ‘Buy’ to ‘Accumulate’ on the back of the recent run-up in prices. 

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-04-26

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