Raffles Medical Group - RHB Invest 2017-04-25: Near-Term Headwinds

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Near-Term Headwinds

We downgrade Raffles Medical to NEUTRAL (from Buy), lowering TP to SGD1.49 (from SGD1.72, 5% upside), on stronger headwinds.
While we are positive on Raffles Medical’s medium-term outlook, with two new hospitals coming on stream in China, we are now more cautious about Singapore’s healthcare scene.

1Q17 results were hit by softer-than- expected foreign patient load. As a result, revenue was down 2% YoY, below management’s full-year guidance of 10% growth.

Rental income from Raffles Holland Village would only contribute more significantly next quarter onwards. According to management, they had given tenants a rent-free period for up to two months. Since most of the tenants only signed towards the end of last year, the rental income would only kick in next quarter.
Raffles hospital extension likely to open only next year. Management guided that the Raffles hospital extension would be completed by 4Q17. However, based on our channel checks, we think this is likely to be operational only next year. This may not be a bad thing, given the current weak demand from foreign patients.

We cut our FY17F-19F earnings by 10-13%, on the weaker healthcare outlook in Singapore. This results in a lower DCF-derived TP of SGD1.49 . At the moment, we have not factored Chongqing hospital into our numbers.
Beyond the immediate headwinds, we are still very positive on the medium-term outlook of Raffles Medical. Unfortunately, management has provided very limited information on Chongqing hospital at this point. Hence, we have not imputed Chongqing hospital into our forecast.
Based on the information available, our back-of-envelope DCF valuation suggests that the Chongqing hospital project could add an additional SGD1.10/share to our current TP on a bull case scenario. Even in a bear-case scenario, we believe this project to be accretive at SGD0.37/share.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-25

RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.49 Down 1.720