Raffles Medical Group - RHB Invest 2018-02-27: Lacklustre Outlook Due To Prevailing Headwinds

Raffles Medical Group - RHB Invest 2018-02-27: Lacklustre Outlook Due To Prevailing Headwinds RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - Lacklustre Outlook Due To Prevailing Headwinds

  • Raffles Medical Group booked a FY17 PATMI of SGD70.8m, ie slightly below our estimate. This was from a slower-than-expected turnaround in MCH Holdings, a decline in its healthcare services revenue, as well as a longer-than-expected rent-free period for its Holland V Medical Centre
  • We trim FY18-19F earnings by 5-10% respectively, as existing headwinds still prevail. 
  • Stay NEUTRAL, with a SGD1.02 Target Price (from SGD1.10, 7% downside).

Margin for its healthcare services unit narrowed significantly. 

  • Although revenue from Raffles Medical’s healthcare services unit dipped by only 1.6% YoY, pre-tax margin for the segment fell to 3.2% (from: 6.9%). The group attributed this to the decrease in the renewal of international healthcare plans, and increased price competition in the healthcare insurance side of the business. 
  • While Singapore’s economy grew better than expected in 2017, we note that the hiring of expatriates has not recovered in a significant way. Thus, we believe near-term headwinds for its margins would persist.
  • In addition, its China clinics (from its wholly-owned subsidiary, International SOS) have yet to turn around. Executive chairman Dr Loo Choon Yong said that the China clinics are still booking high staff costs of around 60-70% of revenue, which is much higher than that of Singapore’s operations (50%).

Foreign patient load remained soft but this was offset by the increase in local patients. 

  • The group announced that it has started a 5-year partnership with the Ministry of Health (MoH) to provide accessible and comprehensive family medical services, under the Primary Care Network (PCN) scheme. It has also been awarded the air borders screening contract by the MoH. 
  • We believe these new contracts would drive its local patient load, moving forward, and help to cover some fixed costs. However, overall, margins are likely to be lower, since these are subsidised services.

Rental boost is not immediate. 

  • We understand that 50% of the space in the new Raffles Hospital extension will be rented out to third parties. However, only 10% of the space has been leased by tenants currently. Certain levels of the building are still undergoing retrofitting works. 
  • In addition, the group is likely to give rent-free periods of 2-3 months to the tenants. As such, we now expect the bulk of the rental income from the new extension to only come in FY19.

Beijing and Shenzhen hospital projects are on hold. 

  • The opening of Raffles Medical’s hospitals in Chongqing and Shanghai in China are scheduled for 4Q18 and 4Q19 respectively. As such, management hinted that plans for hospitals in Beijing and Shenzhen would be put on hold, until its Chongqing and Shanghai hospitals start contributing to group numbers.

Still a NEUTRAL stock. 

  • We cut our FY18-19F earnings by 5-10% respectively on the persistent headwinds, slower rental recognition, and upcoming start-up costs from the new hospitals. As such, our DCF-derived Target Price drops to SGD1.02.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-27
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.02 Down 1.100