Raffles Medical - DBS Research 2018-02-27: Work In Progress

Raffles Medical - DBS Vickers 2018-02-27: Work In Progress 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:
    1. Healthcare division revenue fell 1.6% y-o-y in FY17 and operating profit margins fell to 3.2% vs 7% in FY16;
    2. Raffles Hospital Extension opened in January 2018, expect expansion of new wards to complete by mid-year, 10% pre-committed lease; and
    3. Raised final dividend to 1.75 Scts from 1.50 Scts in FY16.


  • 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;
    1. 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
    2. 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:
    1. better-than-expected ramp-up of new projects/integration process,
    2. stronger-than-expected earnings growth from existing operations, and 
    3. further accretive acquisitions and/or JVs/strategic alliances for entry into new markets.

Rachel Lih Rui TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2018-02-27
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