Raffles Medical Group (RFMD SP) - UOB Kay Hian 2018-02-27: 2017 In Line, But Pleasant Dividend Surprise; Awaiting Expansion In China

Raffles Medical Group (RFMD SP) - UOB Kay Hian 2018-02-27: 2017: In Line, But Pleasant Dividend Surprise; Awaiting Expansion In China RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 2017: In Line, But Pleasant Dividend Surprise; Awaiting Expansion In China

  • Raffles Medical Group’s 2017 net profit of S$70.8m (+0.8% y-o-y) came in within our expectation. A pleasant surprise was its final DPS of 1.75 S cent/share (total DPS of 2.25 S cents/share; +12.5% y-o-y), which reflects the group’s confidence in its longer-term outlook. 
  • We trim our 2018-19 profit forecasts by 2-3% but maintain BUY with a DCF-based target price of S$1.32 (previously S$1.34) as we await more developments and updates on its China expansion.


2017 results broadly in line but pleasant dividend surprise. 

  • Raffles Medical Group’s (RFMD) 2017 net profit of S$70.8m (+0.8% y-o-y) was in line with our and market expectations. 
  • Revenue grew 0.8% y-o-y, driven by its hospital and investment holding revenues which grew 2.3% y-o-y and 21.1% respectively. The latter was due to the fully leased space at Raffles Holland V. This helped to mitigate lower healthcare services revenue, which declined 1.6% y-o-y due to lower renewal of international healthcare plans by its expatriate clients. 
  • A pleasant surprise was its final DPS of 1.75 S cents/share, which brought its total DPS to 2.25 S cents/share (+12.5% y-o-y). We believe this is a good indication of management’s confidence in its long-term outlook and financial strength, notwithstanding the near-term earnings pressure as its new hospitals in China open.

Managing costs well and lower taxes helped. 

  • Against a background of rising costs and new capacity, we think RFMD’s 2.4% y-o-y rise in staff costs is decent. 
  • Despite the 2.5% yoy decline in pretax profits, its net profit grew 0.8% y-o-y, helped by an effective tax of 15% in 2017 (due to tax incentives for innovation & productivity), compared to 18.0% in 2016.


China progress report. 

  • Its Chongqing hospital is on track for opening in 4Q18 whereas the Shanghai hospital is expected to commence operations in 2H19. Piling for the latter is completed and management expects the construction of the building structure to commence soon. 
  • Raffles Medical Group provided clarity on possible start-up costs, with projected 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 200-300 beds, out of which 200 will be private beds and 100 would be public (Yibao) beds. The timing for the roll-out of the public beds is still fluid given that it may be back-loaded. 
  • To manage costs, new foreign doctors will be hired on a contractual basis and matched to revenue. All costs incurred prior to the 4Q18 opening of the Chongqing hospital are expected to be capitalised as pre-operating costs. Currently, Raffles Medical Group has six full time staff in Chongqing but more will be deployed closer to the opening in 4Q18.

Updates on Singapore operations. 

  • The group is making steady progress on Raffles Holland V and Raffles Medical Centre Orchard. 
  • We estimate both have already reached EBITDA breakeven and the Holland V retail area has been fully rented out but full-year rental contributions will only kick in from 2018 onwards.

Strong cash flow to fund growth. 

  • 4Q17 net cash balance was at S$19.16m, significantly lower compared to S$81.5m as at Dec 16. The fall was due to its expansion capex. More importantly, net operating cash flows remained strong at S$82.7m (+5% yoy) in 2017
  • Going forward, we forecast Raffles Medical Group to revert to a net gearing of 16% and 21% by 2018 and 2019 respectively when both its Chongqing and Shanghai hospitals are completed. The anticipated capex till completion for these two hospitals is S$300m, to be incurred over 2018/19.


2018-19 earnings forecasts trimmed by 2-3%. 

  • We trim our 2018-19 net profit forecasts by up to 3% as we build in higher expansion costs. We also introduce our 2020 earnings forecast. 
  • Raffles Medical Group’s net profit is expected to decline gradually and is expected to trough in 2019 upon the opening of its Shanghai hospital. Thereafter, we expect a gradual recovery.


Maintain BUY with a DCF-based target price of S$1.32 (previously S$1.34). 

  • Though Raffles Medical Group’s near-term earnings outlook for the next two years is expected to be lacklustre, 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). In addition, adjusting its ROE to exclude investment properties, its 2017 ROE is at a respectable 19.3%. 
  • For investors with a longer-term horizon, Raffles Medical Group’s 23% decline in share price over the past year is an accumulation opportunity. 
  • We reiterate BUY with DCF-based (WACC of 5.9% and terminal growth of 2.0%) target price of S$1.32 (previously S$1.34).


  • 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 | Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-27
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.32 Down 1.340