RAFFLES MEDICAL GROUP LTD
BSL.SI
Raffles Medical - Work In Progress
- Both FY17 net profit and revenue grew 0.8% y-o-y.
- Raffles Hospital Extension opened in January 2018; expansion works on new wards to complete by midyear.
- Chongqing Hospital targets to open by 4Q18.
- Raised final dividend by 0.25 Scts, total dividend up 12.5% to 2.25 Scts.
Maintain FULLY VALUED, Target Price at S$1.00.
- We maintain our FULLY VALUED rating with Target Price of S$1.00.
- Trading at 29-34x FY18F-19F PE, we believe the valuation reflects its longer-term growth potential. However, we project medium-term downside risks to earnings due to expected gestation period from its expansion plans (Raffles Hospital Extension and two new hospitals in China in 2018/2019).
Where We Differ:
Lower earnings in the medium term impacted by start-up losses.
- While we see long-term growth potential of Raffles Medical’s expansion plans into China, we believe earnings could decline during its gestation period. Hence, we adopt a more cautious and conservative view in the near to medium term despite the previous share price de-rating.
Potential Catalysts:
Better-than-expected ramp-up of new projects/new expansion plans; recovery of existing operations.
- FY17 results in line; growth remains muted; Raffles Hospital Extension opened in January 2018. FY17 net profit grew marginally by 0.8% y-o-y, in line. The slower growth was in line with muted revenue growth of 0.8%. Key highlights:
- Healthcare division revenue fell 1.6% y-o-y in FY17 and operating profit margins fell to 3.2% vs 7% in FY16;
- Raffles Hospital Extension opened in January 2018, expect expansion of new wards to complete by mid-year, 10% pre-committed lease; and
- Raised final dividend to 1.75 Scts from 1.50 Scts in FY16.
Valuation
- Our target price of S$1.00 implies 26x/30x FY18F/FY19F PE. This is based on sum of parts, pegging FY18F/FY19F earnings to historical average PE (since 2005) of 22x plus S$0.20 per share for its China hospitals.
Key Risks to Our View
- Economic slowdown. While healthcare is relatively resilient, private healthcare could be impacted by a slowdown in the economy as elective procedures can be deferred or patients can choose public hospitals as a lower-cost alternative.
WHAT’S NEW - Work in progress
Muted FY17 results from muted revenue growth; margins deteriorated largely from healthcare services.
- Raffles Medical’s FY17 net profit grew 0.8% y-o-y to S$71m; in line with our FY17 estimates. The muted growth was in line with its revenue growth of 0.8% y-o-y from higher contributions from hospital services (+2.3% y-o-y) mainly from increase in local patient load while healthcare services recorded lower revenue (-1.6% y-o-y) due to lower renewal of international healthcare plans for expatriates and strong competitive environment.
- Higher staff costs (+2.4% y-o-y) were partially mitigated by lower tax expenses (-19% y-o-y) mainly from utilisation of tax losses and tax incentives (productivity and innovation credit scheme).
- 4Q17 net profit grew 1% y-o-y led by 4% revenue growth and lower tax expenses (-49%) from utilisation of some tax losses and tax incentives as explained above. This was offset by higher expenses (+7% y-o-y) largely from staff cost (6%), inventories and consumables (+13%), purchased and contracted services (+9%) and other expenses (+15%).
- FY17 EBITDA margin fell 0.3ppt y-o-y to 18.3% while EBIT margin fell 0.5ppt y-o-y to 15.3%, largely led by lower EBIT margins from healthcare services division of 3.2% vs 7% in FY16.
- Raffles Medical raised its final dividend to 1.75 Scts per share from 1.50 Scts per share in FY16. Total FY17 dividends increased 12.5% y-o-y to 2.25 Scts.
Singapore: Raffles Hospital Extension opened in January 2018, making way for expansion of new wards.
- Raffles Hospital Extension opened its doors on 22 January 18 and targets to utilise 45-50% of the space for own expansion. Some relocation works are still ongoing and works on Raffles Hospital to open up new wards and refurbishment of the food & beverage podium is still ongoing. Management expects ongoing works to complete by mid-year. It has achieved 10% of pre-committed leases on the remaining space for lease.
- Subsidiary MC Holdings (MCH) continues to record losses but management believes it could achieve breakeven in FY18.
- On new clinics in Singapore, Raffles met its target of opening six new clinics in 2017 with the opening of two clinics at Changi Airport Terminal 4 and Transit 4 in 4Q17. A new Japanese service was introduced at Raffles Holland V.
- In addition, Raffles Medical signed/received two contracts from the government;
- a 5-year partnership with the Ministry of Health and Agency for Integrated Care (AIC) (started from 1 January 2018) through three Primary Care Network (PCN) clusters to provide care for chronic conditions such as diabetes, hypertension and hyperlipidaemia, and
- Air Borders Screening at Changi and Seletar Airports.
- While contributions from these contracts are small, we believe they generate volume for economies of scale for a start and will have opportunities to grow (via the PCN scheme) only with support from the government.
The new Chongqing Hospital is expected to open by 4Q18.
- The Chongqing Hospital is expected to open by 4Q18. Recruitment of physicians and procurement of equipment have begun in preparation for the opening of the hospital.
- We expect to see some pre-operating losses to creep in from 2H18 onwards. While plans to ramp up the hospital are still in the works, management may consider tweaking the ramp-up on the number of public beds.
Construction works for Raffles Shanghai Hospital on track to open by 2H19.
- The construction works on Raffles Hospital Shanghai remain on track. As per the previous plan, management targets to open the 200-bed hospital by 2H19, one year after the opening of Chongqing Hospital.
Maintain FULLY VALUED rating; Target Price of S$1.00.
- We maintain our FULLY VALUED rating and Target Price of S$1.00. We lower our FY18F earnings estimates marginally by 1%, taking its muted organic growth into account.
- While we like the group’s exposure to the healthcare sector and its long-term growth prospects with expansion into China, we believe its current valuation of 29-34x FY18F-19F PE and 22-24x FY18F-19F EV/EBITDA has priced in the longer-term growth prospects.
- While we believe in the capabilities of Raffles Medical’s management team in developing these new hospitals and the prospects that the China market may offer, we believe start-up losses would weigh on earnings in the medium term, especially in an environment of muted growth in existing operations largely impacted by less robust macroeconomic outlook.
- Potential re-rating catalysts are:
- better-than-expected ramp-up of new projects/integration process,
- stronger-than-expected earnings growth from existing operations, and
- further accretive acquisitions and/or JVs/strategic alliances for entry into new markets.
Rachel Lih Rui TAN
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Andy SIM CFA
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http://www.dbsvickers.com/
2018-02-27
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