Raffles Medical Group - UOB Kay Hian 2016-04-26: 1Q16: No Surprises, Investing For The Future

RAFFLES MEDICAL GROUP LTD R01.SI

Raffles Medical Group (RFMD SP) 1Q16: No Surprises, Investing For The Future

1Q16 results are in line with our expectations. Staff costs outpaced turnover growth but this was due to an acquisition as well as hiring ahead of new capacity.
We raise our 2016-17 estimates by 1-2% and maintain BUY with a DCF-based target price of S$5.11 (previously S$5.07).

Raffles Medical Group’s (RMG) 1Q16 net profit of S$15.5m (+3.7% yoy) was in line with our expectations, accounting for 21.4% of our full-year estimate.
1Q results usually tend to be seasonally weaker, accounting for 19- 22% of full-year estimates as patients defer non-critical treatments due to the festivities.

Operating margins fell 2.6ppt to 16.0% on cost pressure.
Turnover grew 23% yoy on increased patient load, as well as higher revenue contribution from specialist consultants and newly-acquired International SOS (MCH). However, cost pressure remained high as key areas such as staff costs (+27.5% yoy) and inventory costs (+27.9% yoy) exceeded the pace of 1Q top-line growth. However, this is not a surprise as the group's acquisition in MCH was newly consolidated and the synergy is not yet apparent (MCH has 10 clinics in China, Cambodia and Vietnam).

The group's net cash increased from S$54m (as at Dec 15) to S$78m as at Mar 16 due to strong cash generation, with 1QFY16 operating cashflow of S$34.4m.

We understand that operations at RMC Orchard is ramping up well. In 1Q16, RMC Orchard is estimated to have made a loss of less than S$0.5m and is projected to break-even by 3Q16.
As for MCH, management revealed that its cost structure is relatively high, with staff cost/turnover at approximately 58%. The group’s strategy will be to improve its revenue generation and we think this could be from cross referrals from RMG’s network as well as a re-branding exercise of MCH.

Raffles Holland V achieved temporary occupation permit (TOP) in Mar 16 and tenants are currently in the process of fitting-out the fixtures ahead of the opening in June.
To date, we understand that over 60% of the commercial space has been tenanted out and whilst demand has been very strong, management has been very discerning of the tenant mix to ensure the success of the project.
The rental is projected to range between S$12-15psf/month, with units on the ground floor fetching more than S$20psf/month.
As for its hospital in Shanghai, the venture partners are in the midst of securing all approvals and hope to start work soon. The targeted opening date is by Dec 18.

Slight upwards adjustment to 2016-18 profit estimates by 1-2% to account for higher top-line contribution from newly-acquired MCH clinics.
Our estimates have also factored in a higher staff/turnover of 52% for 2016 (51%) and 54% for 2017 (unchanged).
On our latest estimates, RMG is projected to deliver a 3-year EPS CAGR of 13.9% (2016-18F).

We are positive on its long-term prospects and re-iterate BUY with a DCF-based target price of S$5.11 (previously S$5.07).
At our target price, the implied 2016F PE is 39.9x. This is more than its +2SD to mean PE of 37.4x, which is not cheap but deserved, as its 2016-18F ROE of 11.8-14.0% 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/ 2016-04-26

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 5.11 Up 5.07