Raffles Medical Group (RFMD SP) - UOB Kay Hian 2016-10-25: 9M16 ~ Building Up Momentum For 2017

Raffles Medical Group (RFMD SP) - UOB Kay Hian 2016-10-25: 9M16 ~ Building Up Momentum For 2017 RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 9M16 ~ Building Up Momentum For 2017

  • RMG’s 9M16 net profit of S$48.4m, +4% yoy, is largely in line with our expectation.
  • As expected, staff costs grew faster than top-line, but this was due to the acquisition of ISOS and recruitment for Holland V. 
  • We make no change to our 2016-18 net profit estimates (3-year EPS CAGR of 13.9%). 
  • Maintain BUY and DCF-based target price of S$1.70.


9M16 in-line as we expect a seasonally stronger 4Q. 

  • Raffles Medical Group’s (RMG) 9M16 net profit of S$48.4m (+4.1% yoy) is in line with our expectation, accounting for 66% of our full-year estimate. 
  • We expect a seasonally stronger 4Q to lift earnings closer to our full-year estimate, with 4Q historically (2010-15) accounting for 30-35% of full-year earnings. 
  • 3Q16 revenue growth from hospital and healthcare services came in at 39.7% and 6% yoy respectively, where solid growth in healthcare turnover was attributable to higher patient load from expansion of the Raffles Medical Clinic network as well as the newly-acquired International SOS (ISOS). Excluding revenue from ISOS, the group’s 3Q16 revenue would have fallen 7.9%.

Unsurprisingly, costs outpaced revenue. 

  • Although 9M16 group turnover grew 20% yoy, it was outpaced by staff costs (+25% yoy) as well as inventories/consumables (+ 23% yoy), as the group was catering to expanding business operations as well as the new medical centre in Raffles Holland V. As a result, operating margin slipped 2.6 ppt to 16.1%. 
  • Staff costs as a percentage of turnover rose to 51.5% in 9M16 compared with 49.8% in 9M15, owing to step up in recruitment to support expanding business operations. The elevated staff costs were also attributed to the higher cost structure at ISOS, which we believe should have seen a staff cost/turnover of about 60% compared with the 50% in the Singapore operations. 
  • Excluding ISOS, RMG's operating profit in 3Q16 would have grown 4.5% compared with 0.3%.


Raffles Hospital extension scheduled for completion in 1H17. 

  • Upon completion of the extension, it will contribute an additional 220,000 sq ft of GFA to Raffles Hospital. 
  • We estimate 30-40% of the new space will be leased out as RMG gradually ramps up its offering. 
  • The integrated medical complex will provide support to the existing hospital’s range of specialist services, healthcare training and clinical research as well as open opportunities for growth and expansion for future years.

All eyes on China. 

  • The target completion for its Shanghai hospital is end-18 and management is exploring opportunities in other areas such as Shenzhen and Beijing, though nothing is concrete currently. 
  • While management highlights that they are willing to assume debt if the right opportunity arises, they will continue to be relatively prudent.

Raffles Holland Village almost fully committed. 

  • Raffles Holland Village was opened on 8 Jun 16. So far, about 95% of the space has been leased out to tenants such as Virgin Active, Sushi Tei and Pattisez where some of the tenants have opened for business while others are being fitted out. 
  • Management is selective and would only opt for tenants who would enhance the tenant mix and total offerings at Raffles Holland V. 
  • We understand that Raffles Holland Village Medical Centre may break even in less than a year. 
  • Meanwhile, Raffles Medical Centre Orchard is also progressing well and likely to break even by end-16.


  • 2016-18 earnings forecasts unchanged. On our latest estimates, we forecast a 3-year EPS CAGR of 13.9% (2016-18).


Maintain BUY for long-term growth from new capacity. 

  • We believe earnings growth in the near term would likely be lukewarm on the back of elevated costs from expanding business operations as well as consolidation of ISOS subsidiaries. Nevertheless, we remain positive and reiterate BUY with a DCF-based target price of S$1.70 (unchanged).
  • At our target price, the implied 2017F PE is 34.7x. This is slightly more than its +1SD to mean PE of 32.2x, which is not cheap but warranted, as its 2016-18F ROE of 11.8-14.0% compares to its long-term average ROE of 11.6% since 1997. 
  • Also, we think its new capacity in China and Singapore will provide RMG a growth runway for the next 5-10 years.


  • Potential catalysts include: 
    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/ 2016-10-25
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.70 Same 1.700