Raffles Medical Group - CIMB Research 2016-10-24: 3Q16's post briefing notes

Raffles Medical Group - CIMB Research 2016-10-24: 3Q16's post briefing notes RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - 3Q16's post briefing notes

  • ISOS’s quarterly losses are expanding and turnaround is taking longer than expected. Shaw continues to be loss-making.
  • Staff costs (increased recruitment for Holland V and higher cost structure at ISOS) accounted for the majority of 3Q’s 2.6%pt yoy OPM decline. We cut EPS on this.
  • Medical tourism was flat and hospital growth was driven by domestic patients.
  • Guidance for the hospital extension’s initial lease out lowered to 30-40% (from c.75%).
  • Our SOP-based target price rises as we roll forward our valuation. Maintain Reduce.

ISOS quarterly loss run-rate worsening 

  • While ISOS has clearly lifted the group's topline growth (reported 9M16 +20% yoy; exISOS +9% yoy), it continues to be a drag on profitability and its quarterly run-rate has worsened (3Q16 operating profit: -S$0.8m, 2Q: -S$0.5m, 1Q: -S$0.3m). 
  • Management attributed the losses to rebranding and transition costs, coupled with higher staff costs (staff cost/sales is 60+% for ISOS vs. RFMD's existing c.50%). 
  • Guidance is for a better FY17 for ISOS as it grows its corporate client base and improves staff productivity.

Staff cost pressure still prevalent, made worse by ISOS 

  • Staff cost continues to be under pressure due to recruitment for Holland V, made worse by the higher cost structure at ISOS. 3Q’s staff cost/revenue was 51.5% (vs. 48-50% historically). 
  • Taking a 3-year view, we think the staff/cost revenue ratio should remain at an elevated level as the larger magnitude of the hospital extension further adds to cost pressure, mitigated by a maturing Holland V and improved efficiency at ISOS. This accounted for the majority of our FY16F-18F EPS cuts.

Medical tourism still weak 

  • Medical tourism is no longer a growth driver and management highlighted that absolute medical tourism has remained largely flat. Management blamed weak macro conditions, rising healthcare costs in Singapore and a strong S$ as factors for the lack of growth.

Hospital extension update 

  • RFMD now intends to lease out 30-40% of the Raffles Hospital extension (vs. 75% initially). We are generally positive on the longer term prospects of utilising more space for own use as returns are better. However, this also translates to higher depreciation as leased-out space is recognised as investment property and not depreciated.
  • Management updated that the hospital extension is due for completion by end-CY17.
  • Management sounding more positive on Holland V relative to Shaw Shaw medical centre (17.5k sf, opened Jun 15) is still loss-making but management expects it to break even by end-FY16. 
  • When asked about the breakeven timeline for its own Holland V medical centre (9k sf, opened Jun 16), management sounded more positive and expected breakeven within a year. 
  • We attribute the better performance at Holland V to the smaller floor space (i.e. lower costs) and better location.

Maintain Reduce 

  • Valuations are rich at 25.5x CY17F EV/EBITDA with a 6% 3-year EPS (FY16F-18F) CAGR. Regional peers are trading at a cheaper 22x CY17F with a higher 16% EPS growth. 
  • The stock is also trading above its historical mean of 21x. 
  • At the same time, margins continue to decline on cost pressures which could worsen nearing the completion of the Raffles Hospital extension. 
  • Our SOP-based TP only rises (to S$1.46) as we roll forward our valuation. Maintain Reduce.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-10-24
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.46 Up 1.410