Raffles Medical Group - RHB Invest 2018-05-02: Not Ripe Yet

RAFFLES MEDICAL GROUP LTD SGX: BSL

Raffles Medical Group - Not Ripe Yet

Raffles Medical’s 1Q18 PATMI is in line with our expectation. We note that Raffles Medical's share price has run up, after its 4Q17 results.
Downgrade to SELL (from Neutral), with an unchanged SGD1.02 Target Price offering a 11% downside, as we think headwinds still lie ahead.

Although 2H is seasonally stronger than 1H, we think it would be offset by higher costs when its hospital in Chongqing, China commences operations. We also expect to see a dip in earnings in FY19 when Raffles Medical Shanghai opens, while its Chongqing hospital would still be in a ramping-up phase.

Revenue from Raffles Medical Group’s (Raffles Medical) hospital services segment grew 4.2% y-o-y, as its patient load improved.
According to its executive chairman, Dr Loo Choon Yong, the foreign patient load increased by about 2% y-o-y while the local patient load increased by a high single-digit percentage. Spare capacity from the new hospital extension also enabled it to have more room to take on more patients.
Its healthcare services segment grew 6.8% y-o-y on the back of new contracts from government agencies.
However, we expect full-year revenue growth to remain modest, at about 5% y-o-y, as we think Singapore is still structurally challenging for healthcare players – as the SGD remains strong, compared to regional currencies.

Only 10% of the space in the new Raffles Hospital extension has been committed. We note that this is the same number as communicated in the company’s last briefing.
We maintain the view that the bulk of the rental income would only come in FY19.

Previously, management guided for each China hospital to incur an EBITDA loss of SGD8-10m in the first year (ie 12 months) of operations and a SGD4-5m EBITDA loss in the second year. We think FY19 would see a double blow in earnings, as its Chongqing facility would still be in a ramping-up phase while its Shanghai is scheduled to open.
Previously, management indicated that 100 beds in the Chongqing hospital would be allocated to the public at subsidised prices. However, there seems to be a delay or about-face in this plan, due to the difficulty in implementation. The group is still in talks with local authorities to work out the issues. We believe the 100 beds opened to the public could help to cover some fixed operational costs. Without these 100 beds, the group would have to find other alternatives to better utilise the space.

We think Raffles Medical’s valuation is still expensive at this point, given the potential start-up losses from its China hospitals that are to come in 2H18 and FY19.
Downgrade to SELL, with a DCF-derived Target Price SGD1.02.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-02

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