Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-02-21: 2016 Earnings In Line With Expectation; BUY On Long-term Growth

Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-02-21: 2016 Earnings In Line With Expectation; BUY On Long-term Growth RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 2016 Earnings In Line With Expectation; BUY On Long-term Growth

  • RMG’s 2016 net profit of S$70.2m (+1.3% yoy) is in line with our expectation. 
  • Earnings growth was lacklustre as cost pressure remained elevated due to the newly consolidated MCH as well as a ramp-up in staff recruitments to cater to business expansion. 
  • We cut our 2017-18 earnings estimates by up to 6% to account for elevated cost and higher effective tax rate assumptions. 
  • While near-term growth remains challenging, investors should position for longer-term upside as RMG expands overseas further. 
  • Maintain BUY with a lower DCF-based target price of S$1.67.


2016 net profit in line with expectation. 

  • Raffles Medical Group’s (RMG) 2016 net profit of S$70.2m implies growth of only 1.3% yoy as the growth in turnover of 15.4% was outpaced by elevated costs. 
  • Earnings were also impacted by a higher effective tax rate of 18.1% (vs 2015: 15.4%) as the group expands its geographical operations.
  • Nevertheless, 2016 net profit was in line with our expectation, accounting for 96% of our full-year estimate.

Revenue bolstered by positive contributions from all segments. 

  • RMG achieved revenue growth of 15.4% yoy to S$473.6m. 
  • The group saw positive contributions from healthcare services (+30.8% yoy) and hospital services (+6.3% yoy). 
  • The strong revenue growth was driven by higher patient load from the expanding Raffles Medical clinic network, contributions from more specialist consultants, as well as full-year contribution from MCH, which we estimate contributed 6.8% of 2016 revenue.

Elevated costs expected to continue in 2017. 

  • Costs remained elevated in 2016 as key cost items such as staff costs (+18.8% yoy) and inventories/consumables (+15.7% yoy) offset revenue performance. This had 2016 operating margin slipping 2.3ppt to 17.3%. 
  • Staff costs as a percentage of turnover rose to 51% in 2016 compared to 49.6% in 2015, due to staff recruitment on expanded business operations and the new medical centre in Raffles Holland Village. We believe the elevated staff costs were also attributed to the higher cost structure of MCH, which we believe should have seen a staff cost/turnover of about 56%. 
  • Excluding MCH, RMG’s operating profit in 2016 would have grown by 4.4% instead of 1.7%.

Strong cash flow generation raises net cash. 

  • The group's net cash increased from S$54m (as at Dec 15) to S$82m as at Dec 16 due to its strong cash generation, with solid 2016 operating cash flow of S$78.9m underpinning the rise in its warchest. 
  • The group declared a final dividend of 1.5 cents/share, which brought total DPS to 2.0 cents.


Raffles Hospital extension to be completed by 2H17. 

  • Raffles Hospital is progressing as planned, and will contribute an additional 220,000 sq ft of GFA to Raffles Hospital.
  • 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 the future. 
  • Management highlighted that they intend to utilise 50% for internal use. We expect completion in 4Q17 and for the extension to contribute meaningfully only in 2018.

Raffles Hospital Shanghai. 

  • The target completion for the 400-bed Shanghai hospital remains on track for end-18. We understand management is exploring opportunities in other areas such as Shenzhen and Beijing, though nothing is concrete currently.


Maintain BUY on long-term growth due to new capacity. 

  • While near-term earnings growth is likely to be lacklustre as costs are being incurred ahead of new expansion, we remain positive and maintain BUY with a lower DCF-based target price of S$1.67 (previously S$1.70). 
  • At our target price, the implied 2017F PE is 36.1x. This is more than its +1SD to mean PE of 32.6x, which is not cheap but deserved, as its 2017-19F ROE of 11.6-13.1% compares with its long-term average ROE of 11.5% since 1998.
  • Also, we think the new capacities in China and Singapore will provide RMG a growth runway for the next 5-10 years.


  • Potential catalysts, in our view, include: 
    1. accretive new investments in China or M&As, 
    2. earnings synergies from MCH 
    3. better-than-expected performance from Raffles Medical Centre Orchard and Raffles Holland V

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-21
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.67 Down 1.700