Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-10-31: Unexciting Outlook Priced In; U/G To HOLD

Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-10-31: Unexciting Outlook Priced In; U/G To HOLD RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Unexciting Outlook Priced In; U/G To HOLD

Results in line, lacklustre mid-term performance 

  • Raffles Medical Group's 3Q17 results were in line. 9M17 earnings met 69%/70% of our/consensus FY17E. 
  • Revenue and earnings for 3Q17 grew at a lacklustre 0.3% and 1.0% YoY, as the weaker insurance business offset the growth for healthcare segments. Management expects the Singapore business to remain stable, while its first China hospital should reach EBITDA breakeven in the 3rd year or 2021. 
  • Upgrade to HOLD, as the shares have reached our TP after the 3M stock price decline of 12% since our downgrade, reflecting the lacklustre near-to-mid-term outlook. 
  • We raised our FY18E and FY19E EPS by 8% and 2% to account for lower start-up costs of Chongqing hospital, based on management guidance. Accordingly, our DCF-based TP (WACC 7.1%; LTG 1.5) increased slightly by 1% to SGD1.13. 
  • Raffles Medical Group (RFMD) trades at an elevated 39x FY19E P/E due to the profit decline outlook for the next two years.

Flattish performance expected to continue 

  • Revenue growth of 3.1% YoY in the hospital division was offset by a 4.2% decline in healthcare services, as the health insurance division was impacted by higher retrenchment of expatriates in the financial sector and overseas clinics continued to undergo restructuring. However, the general practice business reported a decent 1-2% revenue growth. 
  • On the other hand, growth in the hospital division was driven mostly by local patients, while the volume of foreign patients remains flattish. The upcoming Raffles Hospital extension, completing in 4Q17, is expected to drive long-term growth.

Chongqing hospital requires patience 

  • Management clarified that its Chongqing hospital requires a gestation period of 2 years. It is expected to incur EBITDA losses of SGD8-10m for the first year and SGD4-5m loss for the second year, before breakeven in the third; These are in line with our earlier estimates. 
  • However, management expects to contain pre-opening costs for Chongqing Hospital for FY18, as it will hire diligently before starting the new hospital in 4Q18 and it will utilise the capacity across its considerable base of seven clinics in China. 
  • In the first year, management targets to open 300 beds and hire 120 doctors, of which 50% will be international doctors.

Swing Factors


  • Further progress on more hospitals in China, which could be in other top cities. Shenzhen hospital first announced in Feb 2013.
  • Faster-than-expected breakeven for Singapore expansion.
  • Normal breakeven period is one year.
  • Medical tourism in Singapore could recover from 2015 weakness as RFMD is constantly seeking new source markets.


  • Execution risks for Shanghai hospital, its first outside Singapore.
  • Higher-than-expected start-up costs in major expansion markets such as China.
  • Structural decline of medical tourism in Singapore.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-10-31
Maybank Kim Eng SGX Stock Analyst Report HOLD Upgrade SELL 1.13 Up 1.12