Raffles Medical - DBS Research 2016-07-26: 1H16 results weighed down by start-up/integration costs

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RAFFLES MEDICAL GROUP LTD R01.SI 

Raffles Medical - 1H16 results weighed down by start-up/integration costs

• 1H16 net profit +4% y-o-y, in line with DBS’s but marginally below street’s FY estimates.
• 1H16 EBIT (ex-MCH) +7%, EBIT margins -2.6 p.p.
• Interim dividend of 0.5 Scts, flat y-o-y.
• Raffles Holland V opened in June 2016.

Maintain HOLD, TP of S$1.43. 

• We maintain our HOLD recommendation for Raffles Medical with a TP of S$1.43 (including potential value of its Shanghai JV hospital). 
• At its current valuation of 36x FY17F PE and 26x FY17F EV/EBITDA, the counter has reflected its growth potential, in our view. 
• We project growth over the next few years to be a tad slower than its historical average following gestation period from its expansion plans.

1H16 results in line with DBS’s forecast, marginally below street’s estimates. 

• 1H16 net profit grew 4% y-o-y to S$32m, led by revenue growth from both healthcare (39%) and hospital divisions (12%), offset by higher expenses (26%) from start-up/integration costs (mainly staff costs) of new projects. 
• EBIT margin deteriorated by 2.6ppt to 16%. Excluding MCH, EBIT grew 7%. MCH is estimated to register a small operating loss but management expects it to have positive contributions by 1Q17.

Slower growth in the immediate horizon due to expansion plans. 

• The expansion plans remain on track in Singapore with Raffles Holland V opening in June 2016 (with 60% committed leases) and Raffles Hospital Extension expected to complete in mid-2017. 
• Shanghai Hospital’s completion has been deferred to late 2018. While we are positive on its long-term growth plans, we expect near-term growth to be weighed down by gestation costs.

Valuation:

• Our target price of S$1.43 is based on its historical average PE of 29x on average FY16F/17F earnings. 
• Our estimates include S$0.49/share from the value of its Shanghai hospital.

Key Risks to Our View:

• Economic slowdown. While healthcare is relatively resilient, private healthcare could be impacted by a slowdown in the economy as elective procedures can be deferred or patients can choose public hospitals as a lower-cost alternative.

Rachel TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-26

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