Raffles Medical Group - RHB Invest 2017-02-21: Valuation Is Still Undemanding

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RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Valuation Is Still Undemanding

• Raffles Medical is still our preferred large-cap exposure in the healthcare sector. At its current share price, its valuation is undemanding, ie at 30x FY17F P/E. 
• We believe it would continue to perform with the turnaround of medical centres this year as well as the completion of the Raffles Hospital extension. 
• Maintain BUY, with a lower DCF-derived TP of SGD1.72 (from SGD1.76, 18% upside) as we now expect slower patient load growth in the Singapore healthcare scene.

Costs to increase in tandem with demand. 

• According to management, the Raffles Hospital extension is expected to start operations in 4Q17. 50% of the 220,000 sq ft would be used for hospital services. 
• Management has also confirmed our earlier assumption that there would not be a sudden jump in staff costs. The group would only increase its medical staff if the demand leads to a need for more employees. 
• Currently, revenue growth from its hospital services segment is partly hampered by the lack of space. However, we still expect its patient load to increase when the hospital extension commences operations.

Progress of turnaround of medical centres. 

• Its medical centre at Raffles Holland V broke even in Dec 2016. 
• In Raffles Shaw Centre, most of the medical centres have broken even except for the specialist clinics. 
• While losses from International SOS increased in 4Q16, we understand from management that staff costs as a percentage of revenue have dropped to 56% in 4Q16, from 60% in 4Q15. 
• Its other operating expenses have also come down since 1Q16. 
• We believe that Raffles Medical is on the right track to turn International SOS around by 2017.

Maintain BUY, with a lower DCF-derived TP of SGD1.72. 

• We lower our FY17F-18F revenue by 3-4% and EPS by 6% to account for the slower growth in patient load. 
• Nonetheless, we believe that the stock’s current valuation remains undemanding. Maintain BUY.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-02-21

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.720 Down 1.760