Raffles Medical Group - CIMB Research 2017-10-30: 3Q17 Healthy Patient Volume

Raffles Medical Group - CIMB Research 2017-10-30: 3Q17: Healthy Patient Volume RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - 3Q17: Healthy Patient Volume

  • Raffles Medical Group (RFMD)'s 9M17 core net profit formed 70% of both our and Bloomberg consensus full-year numbers, deemed in line as 4Q is seasonally stronger.
  • Slight uptick in hospital services in 3Q (+3.1% yoy) led by rising local patient load, but flat medical tourism. Healthcare services down 4.2% yoy on lower insurance income.
  • Hospital extension on track for 4Q17F opening, with projected rental contribution from 2H18F onwards; ISOS was EBITDA positive in 3Q17.
  • More visibility on Chongqing start-up costs. We agree with management’s 3-year EBITDA breakeven period and believe such gestation costs are largely priced-in.
  • Maintain Add on this long-term healthcare play with a higher SOP-based TP.

9M17 deemed in line 

  • Raffles Medical Group (RFMD) reported flat 3Q17 topline of S$119.6m, as the slight growth of hospital services (+3.1% yoy) mitigated a 4.2% yoy decline in healthcare services. Staff costs, the largest component of operating expenses, grew 2.1% yoy on the back of wage increment while headcount was largely unchanged. 
  • A lower tax rate due to one-off utilisation of tax losses and incentive boosted 3Q17 overall core net profit (+1.0% yoy), which we deem in line with our and Bloomberg consensus full-year numbers as 4Q is seasonally stronger.

Medical tourism stable, but local patient volume stronger 

  • We continue to see strength in domestic patient load, thanks for RFMD’s continual focus on curative illnesses, which drove the 3.1% yoy growth in hospital services. The group also recorded steady foreign patient volume and average bill intensity in 3Q17. For the healthcare segment, we saw low single-digit revenue growth of general practitioner (GP) services on the back of new clinics, but there was S$1m-2m loss from the insurance business, because of lower renewal of international healthcare plans for expats.

Other positive operational updates 

  • The Raffles Hospital extension is on track to open in 4Q17, with estimated 60% space for own use and balance 40% to be leased out for commercial purposes; we expect rental income in 2H18F. Management also intends to open another 50-100 beds over the next two years at the existing building. 
  • Meanwhile, 55%-owned International SOS (MC Holdings) has attained EBITDA positive, but continues to record net losses in 3Q17 on the back of synergising and attrition costs. We forecast a turnaround in FY19F.

Start-up costs for Chongqing hospital will not be alarming 

  • Given Chongqing hospital’s integrated offering of multiple specialist disciplines, opening of hospital beds in phases and gradual hiring of 120 doctors (well-split between local/foreign), we believe it should achieve EBITDA positive in its 3rd year of operations.
  • Recall that the group’s existing hospital in Singapore took 11 months and two years to break even on the EBITDA and net level, respectively. We forecast S$6m-13m EBITDA loss p.a. over FY18-20F for Chongqing, slightly above management’s guidance.

Maintain Add with higher TP of S$1.24 

  • As we adjust for slower healthcare services growth, higher depreciation expenses from the hospital extension and an enlarged share base, our FY17-18F EPS fall by 1.4-3.5%.
  • Our FY19F EPS is now 2.3% higher to reflect lower gestation costs for Chongqing hospital, resulting in our SOP-based TP rising to S$1.24. We maintain our Add rating on this longer-term healthcare play with exposure to the growing China market. 
  • Key downside risk to our call is poor execution of its overseas hospital expansion.

NGOH Yi Sin CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-10-30
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.24 Up 1.210