Raffles Medical Group (RFMD SP) - UOB Kay Hian 2016-11-18: Share Price Decline Offers Buying Opportunity

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Share Price Decline Offers Buying Opportunity

We see the recent share price pullback as a buying opportunity as longer-term fundamentals remain solid and we are positive on Raffles Medical Group’s (RMG)’s long-term prospects. New capacity in China and Singapore will also offer RMG a growth runway for the next 5- 10 years. There is no change to our 2016-18 estimates (3-year EPS CAGR of 13.9%).

Raffles Medical Group’s (RMG) share price has retraced 14% from its ytd high and our target price now represents 21% upside from the current level.
We deem the recent share price pull back as an attractive entry opportunity into RMG, where new capacity in China and Singapore will offer RMG a growth runway for the next 5-10 years.
Our target price implies 2017F PE of 34.7x which is slightly over +1SD to the mean PE of 32.2x but deserved, given its 2017-18F ROE of 12.6-14% vs the long term average ROE of 11.6% since 1997.

We expect 4Q16 to be a seasonally strong quarter, which historically accounts for about 30% of full-year earnings. Meanwhile, we expect medical tourism to remain stable this year, where foreign patients will continue to account for one-third of patients.
Currently, RMG benefits from foreign patient admissions from over 100 countries, where we are seeing growth in patient numbers from markets such as Indochina (Vietnam and Cambodia).
Nevertheless, the bulk of its patients still stems from Indonesia (about 15-16%). With the recent SGD/IDR weakening since September of about 3%, we may see potential for a pick-up in Indonesian foreign patient inflow in the coming quarters.

According to media reports, with the 12- month moratorium lifted since Nov 15, average premium for the Medishield Life Integrated Shield Plans (ISP) is anticipated to rise 9-15%. This is due to a hike in the number and dollar amount of claims at private hospitals compared with those at public hospitals.
Referencing Prudential, we assess the impact of the rise in ISP premium, which we believe will likely take effect beginning 2017.
Given that the majority of patient admissions to private hospitals tend to be in the age group of 15-65 (about 65%), we estimate premium increase for these policyholders to result in absolute dollar amount rise of S$20-250 p.a. In return, policy annual limits will be raised to S$1.2m from S$0.6m previously, where these ISP customers will also enjoy a higher benefit of a 365-day post hospitalisation cover compared with the current 180 days. In our view, the increase in premium appears to be more than compensated by these benefit enhancements. As such, we see limited number of policyholders downgrading to public healthcare.

We continue to expect demand for private hospitals in Singapore to remain strong, on the back of an ageing population and growing affluence. Additionally, the bed crunch situation in public hospitals continues to contribute to an inpatient spillover effect to private hospitals.
As an indication, bed occupancy rate in public hospitals on average stands at 82.4%, according to the latest data from the Ministry of Health. This compares to our estimate of RMG’s utilisation rate of circa 60-70%.

Meanwhile, the Raffles Hospital extension remains on track. The completion of the extension will contribute an additional 220,000sf of GFA to Raffles Hospital (representing 42% of total GFA). 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.

On our latest estimates, we forecast a 3-year EPS CAGR of 13.9% (2016-18). While we think the growth is likely to be back-ended as the initial upfront cost is likely to dampen near-term growth, we remain positive on longer-term prospects.

Maintain BUY on long-term growth from new capacity with DCF-based target price of S$1.70.
We believe the recent share price pull-back offers investors an attractive entry point to RMG. At our target price, implied 2017F PE is 34.7x which is more than +1SD to mean PE of 32.2x. This is justified given 2017-18F ROE of 12.6-14%, which compares with the long-term average ROE of 11.6% since 1997.
We continue to like the long-term growth runway that new capacity in China and Singapore will bring to RMG.

Potential catalysts, in our view, include:
1. accretive new investments in China or M&As, and
2. earnings synergies from MC Holdings (MCH) (International SOS).

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-18

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.700 Same 1.700