Raffles Medical Group - CIMB Research 2016-07-22: 2Q16 results preview

Raffles Medical Group - CIMB Research 2016-07-22: 2Q16 results preview RAFFLES MEDICAL GROUP LTD BSL.SI 

Raffles Medical Group - 2Q16 results preview

  • 2Q results will be released on the morning of 25 Jul. Key points to focus on include: 1) hospital growth, 2) Holland V, 3) margin pressure, and 4) ISOS profitability.
  • Upside could come from the hospital segment.
  • We see downside risks from further margin compression, partly due to Holland V.
  • Our 2Q16F net profit is S$18.6m (US$13.7), implying 16.6% yoy growth, which looks on the high side relative to 1Q16’s 3.7% growth.
  • We maintain our Reduce call with a SOP-based target price of S$1.41.

Focus on hospital segment’s growth

  • The hospital segment (forms 70-75% of group OP) has been plagued with slowing sales growth (FY13: +11% yoy; FY14: +9%; FY15: +7%), but 1Q16 saw strong growth (+15%) on the back of a recovery in medical tourism. 
  • We note that Singapore’s tourist arrivals remain buoyant, with arrivals from key medical tourism market Indonesia up 9.2% YTD in May 2016. Sustained growth in this segment could represent upside risks to our revenue growth estimates of 7-8% p.a. in FY16-18F.

Holland V unlikely to contribute; checks indicate low occupancy

  • Raffles Holland V only opened in Jun 16 so we do not expect any meaningful contribution to 2Q’s topline. However, we do expect to see further cost pressures kick in due to its completion, especially from staff costs. 
  • Management’s latest guidance on occupancy rates was c.75%. We think there could be downside risks as our recent channel checks hint at weak occupancy rates.

Longer than expected gestation could see margin assumptions cut

  • RFMD facing compressed margins is not new. This already showed up in FY15 as new capacity (Shaw Centre, ISOS) came on stream. 
  • The concern is that margins may come under further pressure in the next few years due to gestation from Holland V and the hospital extension. 1Q16 core EBITDA margin of 17.5% was particularly weak vs. the historical 22-23% in FY13-15. 
  • We therefore see downside risks to our current FY16-18F EBITDA margin assumptions of 22-23%.

Reported capex plans are in line with expectations

  • RFMD chairman Dr. Loo was quoted in a Bloomberg article as saying the group will spend S$1bn over the next three years to set up hospitals and clinics, of which S$600m will be for expansion in China. 
  • This is consistent with our expectations. Recall that the Shanghai hospital is expected to be operational by end-2018 but RFMD is still in early planning stages for the Shenzhen and Beijing hospitals. His recent comments possibly hint that concrete plans for Shenzhen/Beijing could be finalised in the near future.

2Q16 could come in below expectations; Maintain Reduce

  • Based on average seasonality over the past three years, our 2Q16F net profit estimate is S$18.6m. This implies 16.6% yoy growth (1Q16: +3.7% yoy; FY15: +4.9%). 
  • Consensus is expecting an even higher S$19.7m. 
  • Given a backdrop of further margin pressure, we could see consensus-wide EPS cuts. 
  • Our Reduce call and SOP-based target price of S$1.41 are intact. 2Q16 results will be released on the morning of 25 Jul.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-22
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.41 Same 1.41