Raffles Medical Group - CIMB Research 2017-07-31: 2Q17 Earnings Flat Yoy But Could Start Dropping?

Raffles Medical Group - CIMB Research 2017-07-31: 2Q17: Earnings Flat Yoy But Could Start Dropping? RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - 2Q17: Earnings Flat Yoy But Could Start Dropping?

  • Raffles Medical Group (RFMD)'s 2Q17 net profit (+0.5% yoy) was broadly in line, forming 24% of our FY17F forecast.
  • We deem 1H17 net profit in line, at 46% of our FY17F forecast.
  • Revenue (+1% yoy) was muted, as expected, with medical tourism in Singapore still weak. On the plus side, EBITDA margin was firm in 2Q (but may worsen in 2H17F).
  • No change to our earnings forecasts or SOP-based TP. Maintain Reduce.

Operations in Singapore were muted

  • 2Q17 net profit (S$16.8m, +0.5% yoy) was in line with our expectations. However, RFMD’s earnings outlook and overall tone looks muted. 2Q group revenue was up a marginal 1.0% yoy, driven by hospital services (+0.3% yoy) but offset by healthcare services (-1.1% yoy). 
  • Management guided that medical tourism in Singapore is still weak and we do not expect to see any recovery in the near term.
  • Management guided that overall patient volumes are still rising (low-single-digit growth yoy in 2Q17), mostly driven by outpatient volumes. However, inpatient volumes were down yoy during the quarter.

Could Holland V be masking the cracks?

  • Recall that Holland V opened in Jun 2016 and our grouse in 1Q17 was that we did not see any meaningful yoy uplift in earnings then, which management explained was due to 1Q not comprising a full quarter of rental contribution. 
  • Disappointingly, Holland V should have been fully operational in 2Q but there was again no material uplift in the group’s revenue or earnings this quarter. Our concern now is Holland V may be masking weakness in the group’s existing business.
  • Separately, management guided that Holland V’s gross yield was 5.8%, which we deem decent in today’s market.

EBITDA margins was stable yoy for the second consecutive quarter

  • On a more positive note, RFMD’s core EBITDA margin was fairly stable at 19.4% in 2Q17 (2Q16: 19.7%; 1Q17: 18.3%), helped by lower promotion and advertising expenses. 
  • We understand that additional staff costs were incurred in 2Q17 in preparation for the group’s Singapore hospital extension in 4Q17F. We think this would intensify as recruitment accelerates in the coming quarters. This could pose downside risk to our earnings estimates and we will be keeping a watchful eye on it.

Delay in Shanghai hospital opening

  • The opening of RFMD’s Shanghai hospital (400 beds) has been delayed. RFMD is now guiding for the hospital to be operational by 2H19F (end-2018F previously). We would not be surprised if there are further delays.
  • However, we think the one-year delay in the opening of its Shanghai hospital could be a positive, as it would ease cost pressure on the group, given that its 700-bed Chongqing hospital is also due to open in 2H18F.

Maintain Reduce

  • No changes to our EPS forecasts or SOP-based TP of S$1.25. Maintain Reduce on the back of muted earnings growth outlook and above-peer EV/EBITDA valuations.
  • Risks to our call include lower-than-expected gestation costs.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-07-31
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.250 Same 1.250