Raffles Medical Group - CIMB Research 2017-02-20: Post analyst briefing update ~ Margins could yet worsen

Raffles Medical Group - CIMB Research 2017-02-20: Post analyst briefing update ~ Margins could yet worsen RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Post analyst briefing update ~ Margins could yet worsen

  • We think it is still too premature to start turning positive on RFMD. Both 4Q16 topline and bottomline were weak, and costs could yet intensify.
  • Weak medical tourism, limited domestic growth and expansion costs are hitting the group’s hospital segment. Hospital saw its first ever PBT decline in FY16 (-3% yoy).
  • Losses at ISOS are also widening and route to profitability could take longer than expected.
  • We cut our EPS on slower sales growth and lower margins. Accordingly, our SOP-based TP falls to S$1.36. Maintain Reduce.

Topline missed amid weak demand 

  • 4Q16 topline growth was weak amid slowing demand. As 4Q is typically its strongest quarter, the 1% qoq sales decline in 4Q16 was especially poor. 
  • Management attributed the weakness to medical tourism (declining Indonesian patients) and an uncertain macro environment which would have led patients to either postpone procedures or switch to the public sector. 
  • We do not expect demand to recover soon and lower our FY17F hospital revenue growth forecast to 5% (prev. 8%).

Still seeing a drop in Indo patients 

  • The miss in medical tourism mostly came from Indonesian patients (single-digit decline). Indo patients now form less than 20% of RFMD’s total foreign patients (prev. 20+%).
  • Even as management cited growth from other markets (Malaysia, Vietnam, Myanmar and China), the tone was that medical tourism growth (if any) will likely be subdued. 
  • Key deterrents include 
    1. a strong S$, 
    2. rising private healthcare costs, and 
    3. competition from regional hospitals.

Hospital extension likely to be accompanied by higher costs 

  • Common investor concerns include the timing of its Singapore hospital extension (scheduled completion: 2H17) amidst slowing demand and associated cost pressures.
  • However, management guided that it operates a demand-led model and will ramp up in phases according to demand; cost concerns are, therefore, manageable. However, we remain cautious and note that margins are already being squeezed. 
  • FY16 hospital PBT was down 2.8% yoy even as revenue grew 4.8% yoy.

Where does ISOS fit in? 

  • Widening losses at 55%-owned ISOS have not helped the group’s cost pressures. 
  • We understand the drag is mostly at the manpower level. Staff cost/revenue was 60+% upon acquisition but has been brought down to c.56%. Using RFMD’s existing operations as a benchmark, we think an optimal level will be 50%. 
  • Management highlighted that it has taken an active role in managing this business and has a new management for ISOS. However, we still expect transition costs and view a turnaround in FY17 as unlikely.

Not yet time for a turnaround, maintain Reduce 

  • Overall, we cut our FY17-18F EPS by 8-12% on the back of slower hospital segment growth and continued margin pressure. Accordingly, our SOP-based TP falls to S$1.36.
  • With valuations still rich at 26.7x CY17F EV/EBITDA and accompanied only by a 5% EPS CAGR over FY17-18F, we keep our Reduce rating. 
  • The stock continues to trade above peers (23x CY17F EV/EBITDA) and its historical 5-year mean (also 23x). 
  • Upside risks to our call could come from further greenfield hospital plans in China.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-02-20
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.360 Down 1.460