Raffles Medical - DBS Research 2016-10-25: Moving along as planned

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RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical - Moving along as planned

• 9M16 results broadly in line with expectations of a typically stronger 4Q16.
• 9M16 EBIT (ex-MCH) grew 6%; margins down 1.2ppt q-o-q.
• Raffles Holland V has achieved 95% committed space, construction of Shanghai hospital has started.

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 25x 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.

9M16 results in line, with expectations of a typically stronger 4Q16. 

• 9M16 net profit grew 4% y-o-y to S$48m, led by revenue growth from both healthcare (39%) and hospital divisions (10%), offset by higher expenses (24%) from startup/integration costs (mainly staff costs) of new projects. 
• EBIT margin deteriorated by 1.2ppt q-o-q to 15.6%. Excluding MCH, EBIT grew 6%. 
• MCH is still in the red, incurring an estimated loss of S$1.6m in 9M16. 
• Despite a slower-than-expected integration process, management saw growing interest/usage of its regional network by both existing and new corporate clients, which bodes well for MCH’s growth.

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 (95% committed leases to date) and Raffles Hospital Extension expected to complete in 2H17. 
• Elsewhere, Shanghai Hospital’s completion is expected by late 2018. 
• While we are positive on Raffles Medical's 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$0.16/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 Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-25

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.43 Same 1.430