Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-10-31: 9M17 Results In Line; Better Clarity On Expansion Costs

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 9M17 Results In Line; Better Clarity On Expansion Costs

Raffles Medical Group (RFMD) posted a 9M17 net profit of S$48.7m (+0.5% yoy), in line with our estimate, accounting for 70% of full-year estimate. We expect a stronger 4Q17.
More importantly, the group provided better clarity about its plans to manage expansion costs in 2018/19.

Raffles Medical Group’s (RFMD) 9M17 net profit accounted for circa 70% of our full-year forecast but 4Q tends to be seasonally stronger. As an indication, 4Q16 and 4Q15 accounted for 30-31% of its full year earnings as non-critical treatments (such as health check-ups and other claimable treatments) tend to be concentrated in 4Q Weak healthcare compensated by recovery in hospital revenue.
9M17 net profit of S$48.7m was flat (+0.5% yoy), which was respectable as revenue declined marginally (- 0.1% yoy). The weakness came from its healthcare division (3Q17: -4.2% yoy) due to lower renewals of international healthcare plans for expatriates. On a positive note, the hospital division enjoyed a 3.1% yoy rise in revenue, helped by the increase in local patient load.
Operating margins slipped 0.3ppt to 15.8% in 9M17 and we think this was due to higher staff costs (3-5% salary increment in 3Q17) and lower billing intensity for its hospital division on the shift towards local patients.

The group provided some clarity on start-up costs and expects EBITDA losses of S$8m-10m for the first year of its Chongqing hospital operations, S$4m-5m EBITDA losses in the second year and EBITDA breakeven in the third year. In terms of beds, the hospital will open in 4Q18 with 300 beds, out of which 200 will be private beds and 100 would be public (Yibao) beds.
Treatment costs for the private beds are expected to be comparable to Singapore pricing and the plan is to hire 120 doctors. Half of the doctors will be foreign doctors (20 will be transferred from RMG’s existing pool of doctors) and the remainder will be from China. To manage costs, new foreign doctors will be hired on contractual basis and matched to revenue.
All costs incurred prior to the 4Q18 opening of the Chongqing hospital will be capitalised as preoperating costs.

The group is making steady progress on these two medical centres. Both have reached EBITDA breakeven already and the Holland V retail area has been fully rented out.

3Q17 net cash balance was S$40.6m, lower compared to S$81.5m as at Dec016. The decline in cash balance was due to capex. More importantly, cashflow generation remains strong, with net operating cashflows of S$24.5m in 3Q17.
Looking ahead, we forecast the group to revert to a net gearing of 24% by 2019 when both its Chongqing and Shanghai hospitals are completed.

2018-19 earnings forecasts raised to better reflect start-up costs but tempered by healthcare. We tweaked our 2018-19 net profit forecasts by up to 5% as we only factor in Chongqing losses from 4Q18 onwards rather than the full year of 2018.

While RMG’s nearterm earnings outlook for the next two years are likely to be uninspiring, its long-term growth potential will be significantly enhanced for the next 10 years given a near quadrupling of capacity (from around 200 to 1,300 beds when its China hospitals are fully opened).
We have a BUY rating with DCF-based target price of S$1.34 (previously S$1.28).

Potential catalysts, in our view, include:
1. more accretive new investments in China or M&As, and
2. smooth execution in the launch of its new hospitals in China.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-31

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