Raffles Medical Group - CIMB Research 2018-04-30: 1Q18 HOLD For Longer-term Growth

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group’s 1Q18 core net profit of S$15.8m was within our/consensus expectations.
Domestic patient strength and new screening contract were the main topline drivers, but partially offset by higher costs from inventory, depreciation and staff.
10% of the hospital extension leased out, with 15 specialist centres relocated there.
China operations on track; we expect to see the bulk of staff hiring in 3Q18.

With limited upside and upcoming gestation costs, we downgrade from Add to HOLD.

Raffles Medical Group posted a 1Q18 core net profit of S$15.8m (+1.7% y-o-y), in line at 25% of our/ consensus full-year forecasts.
We saw revenue growth across both healthcare services (+6.8% y-o-y) and hospital services (+4.2% y-o-y), on the back of increasing local patient load, and new contracts for air borders screening services with Ministry of Health and Civil Aviation Authority of Singapore.
Medical tourism was stable in 1Q18, while average bill sizes inched up slightly due to price inflation and more complex procedures.

On our recent visit to the hospital extension, we observed the relocation of 15 specialist centres (including cancer, children and internal medicine centres) with sizeable patient footfall. Management intends to lease out 40-50% of the new extension, of which 10% has been leased out, amidst ongoing efforts to curate the tenant mix.
Refurbishment of certain floors of the existing building commenced in 1Q18, which could see opening of new wards and the addition of 50-100 beds in 3Q18.

Both Chongqing and Shanghai hospitals are on track to be operational in 4Q18 and 2H19 respectively. Apart from opening hospital beds in stages (200 for Chongqing in the initial phase), Raffles Medical Group also plans to progressively hire a mix of 120 specialists (50/50 local and foreign, supported by part-time and visiting consultants) and support staff, in order to manage the start-up costs of both hospitals.
Management has also started engaging with international and Chinese insurers.

While overall topline was up 4.6% y-o-y, this was partially offset by higher inventories, depreciation and staff costs attributable to the new hospital extension, which was officially opened on 22 Jan 2018.
We expect increasing costs to weigh on the group’s near-term profitability, arising from
1. progressive staff hiring,
2. depreciation of new hospitals, and
3. financing for these projects.

We raise our FY18-19F EPS by 0.1-1.9% on lower start-up costs for both China hospitals, but downgrade from ADD to HOLD with an unchanged SOP-based Target Price of S$1.24, as we expect the share price to remain range bound with 2 major expansion plans in the pipeline.
Potential catalysts are faster-than-expected EBITDA breakeven and stronger domestic growth.
Poor overseas execution and unfavourable regulatory changes could pose downside risks to our call.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-30

SGX Stock Analyst Report HOLD Downgrade ADD 1.240 Same 1.240

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