Raffles Medical Group - OCBC Investment 2016-11-24: Upgrade after price correction

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RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Upgrade after price correction

• Slow but steady earnings growth.
• Expansion plans on track.
• Current price point attractive.

Earnings growth slow and steady 

• We note that Raffles Medical Group (RMG)’s share price has corrected by another ~8% since the release of its 3Q16 results in late Oct. Given the on-going expansion plans, expenses may inevitably run ahead of topline contribution, thus a slower earnings growth trajectory vs. earlier years. 
• Nonetheless in the longer run, growth remains intact in our view. Based on the last results briefing, we understand that the medical centre at Shaw Centre may breakeven by the end of this year, and the medical centre at Holland Village could breakeven next year. 
• Since its participation into a JV in International SOS (MC Holdings) (ISOS MCH) from Oct 2015, the group has incurred certain integration and transition costs while management has been working on improving the efficiency of this business.

International expansion a key avenue for long term growth 

• As the local healthcare system continues to evolve with rising competition from both restructured hospitals and private hospitals, we believe RMG is still a strong contender in the region. Locally, the Raffles Hospital Extension, which is slated to complete by 1H17, will add about 220k sq ft of GFA to house new services like Radiotherapy and expand specialist services.
• Besides growth coming from its local operations, they have been gradually expanding its presence overseas to ensure sustainable growth in the longer term. The group is currently in four other countries – China, Vietnam, Cambodia and Japan.
• The Shanghai hospital project is also slated to be ready by end 2018. Execution remains a key factor to success in China, and we believe RMG’s management strength gives some assurance to this project.

Upgrade to BUY 

• In addition to a steady long term growth story, RMG also has a healthy balance sheet with net cash of S$78.0m as of 30 Sep-16. 
• At current price point, we are upgrading RMG from hold to BUY, with an unchanged fair value estimate of S$1.61, offering a potential total return of ~17%.

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2016-11-24

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