Raffles Medical Group - UOB Kay Hian 2016-07-26: 1H16 In Line As Expansion Costs Are Phased In

RAFFLES MEDICAL GROUP LTD R01.SI

Raffles Medical Group (RFMD SP) - 1H16: In Line As Expansion Costs Are Phased In

RMG’s 1H16 results are within our expectation. Staff cost growth outpaced turnover growth but this was due to its acquisition of MCH and hiring ahead for Holland V.
We maintain our 2016-17 net profit estimates. Maintain BUY and DCF-based target price of S$1.70.

Raffles Medical Group’s (RMG) 1H16 net profit of S$32.2m (+4% yoy) is in line with our expectation, accounting for 44% of our full- year estimate.
1H earnings typically account for 42-46% of full-year estimate as 2H is seasonally stronger. An interim dividend of 0.5 cents/share was announced.

Although turnover grew 21% yoy, this was outpaced by a 26% yoy rise in staff cost and a 25% yoy rise in inventories/consumables as costs from its expansion plans kicked in (including new staff for Holland V and the acquisition of International SOS (MC Holdings) Pte Ltd (MCH). As a result, operating margins slipped 2.5ppt to 16.4%. This should not be surprising as MCH was newly consolidated and the synergy is not yet apparent (MCH has 10 clinics in China, Cambodia and Vietnam).
There was also a one-off cost associated with the branding of MCH’s clinics, which we understand amounted to S$1m. In terms of staff cost, the group ramped up recruitment ahead of the opening of Holland V on 8 Jun 16.
As a result, 1H16 staff cost as a percentage of turnover rose to 51.5% from 49.8% in 1H15. Excluding MCH, RMG's 2Q16 operating profit grew 6.5% yoy (vs 4.1% when MCH is included).

Situated on level five of the mall, the medical centre offers services including family medicine, health screening, dental and traditional Chinese medicine.
Commercial spaces have been leased to tenants including DBS bank, Sushi Tei and Café O, some of which have been opened for business while others are being fitted out. As of 25 Jul 16, 60% of the space has been committed.
Including units under negotiation, occupancy rate would have been 90% but the group is very selective and would only opt for tenants that would enhance the tenant mix and total offering for Raffles Holland V.
In terms of rental rates, we understand the range is S$12.50-15.00psf/month.

When completed in 1H17, it will contribute an additional 220,000sf of gross floor area to Raffles Hospital. The integrated medical complex will provide support to the hospital’s range of specialist services, healthcare training and clinical research as well as open opportunities for growth and expansion for future years. Raffles Medical Centre Orchard is performing well and the group hopes to break even by 4Q16/1Q17.
As for China, the target completion for its Shanghai hospital is end-18 and management is exploring opportunities in other regions such as Shenzhen and Beijing. While management highlights it is willing to assume debt if the right opportunity arises, it will continue to be prudent.

We maintain our 2016-18 net profit estimates and forecast a 3-year EPS CAGR of 13.9% (2016-18). However, growth is likely to be towards 2017-18 as synergies from MCH have yet to accrue and newly opened facilities like Holland V and its Raffles Hospital extension will need time to ramp up.

While near-term earnings growth is likely to be lacklustre, we are positive on its long-term prospects.
Reiterate BUY and DCF-based target price of S$1.70.
The stock could see near-term price weakness but based on its track record and measured expansion plans, we think longer-term investors could see profit taking as an entry potential. At our target price, the implied 2017F PE is 34.7x. This is slightly more than its +1SD to mean PE of 31.7x, 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 growth capacity for the next 5-10 years.
Management’s track record speaks for itself, with a 15.7% CAGR in shareholders returns since its IPO in 1997.

We see potential catalysts from:
1. accretive new investments in China or M&As, and
2. earnings synergies from MCH.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-26

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.70 Same 1.70