Raffles Medical Group - DBS Research 2019-02-26: Patient-ly Waiting

RAFFLES MEDICAL GROUP LTD (SGX:BSL) | SGinvestors.io RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - Patient-ly Waiting

  • Raffles Medical Group's FY18 net profit grew a marginal 0.4% y-o-y, slightly above expectations. 
  • Growth was supported by healthcare services division (revenue: +6% y-o-y) and lower staff costs (-0.6%). 
  • RafflesHospital Chongqing opened in Jan19. 
  • Final DPS raised to 2 Scts from 1.75 Scts in FY17. 



Upgrade to HOLD from FULLY VALUED, Target Price raised to S$1.12 from S$1.00.

  • While Raffles Medical Group's share price may be trading at the upper band of its historical range, we believe it has priced in the gestation of RAFFLES MEDICAL GROUP LTD (SGX:BSL)'s new hospitals in China and downside risks are limited based on our valuations, and given that FY19F-FY20F earnings have now factored in start-up losses from its new hospitals in China.


Where We Differ:

  • Gestation period priced in, limited downside risks. While we expect earnings could decline (though still profitable) during the gestation period of its new hospitals, we believe earnings estimates and Raffles Medical Group's share price has reflected the drop in earnings.


Potential Catalysts:

  • Better-than-expected ramp-up of new projects/new expansion plans; recovery of existing operations.


FY18 results marginally above expectations; RafflesHospital Chongqing opened on 2Jan19.

  • Raffles Medical Group's FY18 net profit grew 0.4% y-o-y to S$71m, marginally above expectations, largely supported by healthcare services (revenue: +6% y-o-y) and lower staff costs (-0.6% y-o-y).
  • Key highlights:
    1. RafflesHospital Chongqing opened in Jan19, expect start-up losses to kick-in in FY19;
    2. RafflesHospital Shanghai to complete by 4Q19; and
    3. FY18 final dividend raised to 2.00 Scts from 1.75 Scts in FY17.


Valuation:

  • Our target price of S$1.12 is based on sum of parts, pegging FY18F/FY19F earnings to historical average PE (from 2013) of 27x 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 - Patient-ly waiting


FY18 results marginally better than expectations; mainly supported by healthcare services.

  • Raffles Medical Group’s FY18 net profit grew 0.4% y-o-y to S$71m; marginally above consensus’ and our FY18 estimates. The muted growth was in line with its revenue growth of 2.4% y-o-y, partially offset by higher interest cost. Revenue growth was largely led by healthcare services (+6% y-o-y), offset by lower revenue from hospital services (-0.8% y-o-y). The increased revenue in healthcare services division was mainly due to contributions from its new contract to provide Air Borders screening and new corporate clients (replacing some of non-renewal contracts in 2H17). Hospital services continued to be challenging especially with lower demand from foreign patients.
  • Raffles Medical Group's FY18 EBITDA margin improved marginally by 0.1ppt y-o-y to 21% (vs 19.9% in FY17) partially led by lower staff costs (- 0.6% y-o-y). EBIT margin improved 0.4ppt y-o-y to 17.2%, as EBIT margins from healthcare services division improved to 5.7% in FY18, closer to its margins pre-FY17. In FY17, the healthcare services division recorded an exceptionally low EBIT margin of 3.2% partially impacted by lower renewal of international healthcare plans for expatriates and strong competitive environment.
  • Raffles Medical Group's 4Q18 net profit fell 0.6% y-o-y despite a 4% revenue growth, mainly due to lower tax expenses (+39%) from lower tax incentives claimed.
  • Raffles Medical Group went into net debt position for the first time at S$11m, as it increased its capex to expand its businesses. However, net gearing level is low and healthy as the group generates strong positive operating cashflow. However, we expect net gearing will increase as it invests in its two new hospitals.
  • Raffles Medical Group raised its final dividend to 2.00 Scts per share from 1.75 Scts per share in FY17. Total FY18 dividend increased 11.1% y-o-y to 2.50 Scts.

Raffles Hospital refurbishment / renovations are expected to complete by mid-2019.

  • With the opening of Raffles Hospital Extension, refurbishment / renovations works on the existing building began in 2Q18 and are expected to complete by mid-2019.

Singapore 2019 Budget.

  • While management could not quantify the impact from the announced extension of Community Health Assist Scheme (Chas) and better benefits to the Merdeka Generation seniors, management believes that this increases the number of people that are subsidised as they seek medical treatment from the GP clinic network. This bodes well for Raffles Medical Group’s healthcare services division.


RafflesHospital Chonqging opened on 2Jan19; start-up costs / losses to be incurred progressively in FY19.

  • RafflesHospital Chongqing opened and began operations on 2Jan19. Management has hired some 200 staff for the new hospital including some 30 to 50 staff seconded from its Singapore operations. We expect these costs and potential start-up losses / costs to be incurred progressively in FY19.
  • Management maintains its estimates of start-up EBITDA losses of S$8m to S$10m in first year of operations, S$4m to S$5m in second year of operations and expects to breakeven at the EBITDA level by year three.
  • While management says it is still too early to share its operational performance after 2 months since it started operations, management was encouraged to see patients travelling from other provinces such as Guangdong.

RafflesHospital Shanghai expected to complete by 4Q19 (previously targeted to open by 2H19).

  • The construction works on Raffles Hospital Shanghai remain on track. It is expected to complete by 4Q19 (previously targeted to open by 2H2019). Based on the experience from RafflesHospital Chongqing, we would expect RafflesHospital Shanghai to open in FY2020.


Updates on FY18:

  • We provide brief updates on FY18 as it has been a while since our last report. In summary, FY18 was a year of consolidation as it started refurbishment / renovation works on Raffles Hospital Singapore and awaits the opening of its two new hospitals.
  • On operational performance, while hospital services division was challenging (FY18 revenue: -0.8% y-o-y), revenue growth was supported by its healthcare services division. With some cost management (largely from staff costs), Raffles Medical Group managed to keep FY18 net profit relatively stable.
    • Jan18: Raffles Medical Group started a 5-year partnership with Ministry of Health (MOH) and the Agency for Integrated Care (AIC) from 1 Jan18 through three Primary Care Network (PCN) clusters around Singapore.
    • Jan18: Raffles Hospital Extension opened its doors on 22 Jan18 and refurbishment / renovation works on the existing building began in mid-2018.
    • Aug18: RafflesHealthInsurance (RHI) launched Raffles Shield on 1Aug18, which marks its entry into the Integrated Shield market as the 7th MediShield player in the market. In addition, RHI signed a strategic partnership with NTUC Income Insurance to offer its panel of specialists and clinical indicator assessment.
    • Aug18: Raffles Medical Group signed a MOU with China Taiping Insurance Group to jointly provide medical / healthcare insurance solutions, healthcare management services and explore health-related real estate opportunities. While there has been limited updates thus far, we believe this collaboration, if successful, could
      1. open up its outreach to patients for its upcoming new hospitals in China, and
      2. China Taiping could be a potential strategic / financing partner to co-invest in Raffles’ new hospitals and future expansion in China.
    • Oct18: Raffles Medical Group exercised its call and put option to acquire an additional 25% interest in International SOS (MC Holdings) Pte LTd (MCH) for a total consideration of US$1.77m (S$2.44m) raising its stake to 80% from 55% previously.

Upgrade to HOLD from FULLY VALUED rating; raised our Target Price to S$1.12 from S$1.00 previously.

  • We upgrade our rating to HOLD from FULLY VALUED and raised our Target Price to S$1.12 from S$1.00. We raised our FY19F earnings estimates by 6% to defer the start-up costs / losses from RafflesHospital Shanghai to FY20 instead of FY19 previously, and lower staff costs from its Singapore operations as seen in FY18.
  • We raised our Target Price to S$1.12 by pegging FY19F earnings to historical average PE (from FY13) of 27x (previously 22x) plus S$0.20 per share for its China hospitals. We raised our PE valuation as we have factored in start-up costs from the new hospital in FY19F and we believe the historical average PE (from FY13) is more reflective of its current trading range.
  • Raffles Medical Group's share price is currently trading at 33-34x FY19F-20F PE (at 1 standard deviation above historical average) and 23-25x FY19F-20F EV/EBITDA. While Raffles Medical Group's share price may be trading at the upper band of historical range, we believe it has priced in the gestation of its new hospitals in China and downside risks are limited, based on our valuations and given that FY19F- FY20F earnings have now factored in start-up losses from its new hospitals in China.
  • In addition, the latest announcement of the extension of Chas to cover all Singaporeans for chronic conditions at GP clinics and better benefits to the Merdeka Generation seniors bodes well for Raffles Medical Group’s healthcare services.
  • A steady progressive growth in healthcare services contribution could help offset some start-up losses from its expansion in China. However, if start-up losses incurred are higher than management’s estimates, this could impact our earnings forecasts, and rating.
  • 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 Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-02-26
SGX Stock Analyst Report HOLD UPGRADE FULLY VALUED 1.12 UP 1.000



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