Healthcare Sector - CGS-CIMB Research 2019-05-21: UNDERWEIGHT

Healthcare Sector - CGS-CIMB Research | SGinvestors.io RAFFLES MEDICAL GROUP LTD (SGX:BSL) HEALTH MANAGEMENT INTL LTD (SGX:588) TALKMED GROUP LIMITED (SGX:5G3) Q & M DENTAL GROUP (S) LIMITED (SGX:QC7)

Healthcare Sector - UNDERWEIGHT


Positive catalysts to look out for


Expect start-up costs to remain well-contained.

  • With most healthcare companies like RAFFLES MEDICAL GROUP LTD (SGX:BSL) and HEALTH MANAGEMENT INTL LTD (HMI, SGX:588) facing gestation from new hospital openings, investors’ focus has turned to the extent of start-up losses.
  • Both companies have shown good cost discipline in their recent 1QCY19 results -
    • Raffles Medical Group’s EBITDA loss of S$1.8m (for Raffles Chongqing Hospital) met management’s full-year loss guidance of S$8m-10m, and
    • HMI recorded S$0.7m EBITDA loss for its StarMed Singapore operations.

Resilient domestic business.

  • Despite profitability erosion from gestation costs, healthcare companies continue to see topline growth underpinned by stronger domestic business.
  • HMI recorded higher patient volume and average bill sizes across its two hospitals in Malaysia, resulting in an 8.1% y-o-y increase in revenue.
  • Raffles Medical Group’s revenue was also up 6.7% y-o-y, thanks to higher utilisation of inpatient capacity in Singapore, new corporate clients and government contracts.
  • Meanwhile, the return of TALKMED GROUP LIMITED (SGX:5G3)’s key doctor (Dr Ang) boosted its 1Q19 revenue by 40.7% y-o-y; and Q & M DENTAL (SGX:QC7) saw 4% y-o-y growth in its 1Q19 topline, attributable to higher revenue from its Singapore clinics.


Negative catalysts to fear


Slower ramp-up of patient load for new hospitals.

  • We think setting up operations in a new overseas market takes time, in terms of building brand awareness and attracting patient footfall, especially in the absence of an established hub-and-spoke model. There was little revenue contribution in 1Q19 from the new hospital for Raffles Medical Group (YTD: 500 patients) and ambulatory medical centre for HMI, respectively. We expect a more meaningful step-up in revenue, in coming quarters.

Risk of losing shine from medical tourism.

  • While medical tourism in Singapore has largely been stable, helped by the recovery of the Indonesian rupiah against the Singapore dollar since its record-low in late-2018, the increasing cost competitiveness and service quality of neighbouring countries could mean losing further market share in regional medical tourism, potentially impacting more exposed companies like Raffles Medical Group and TalkMed.


Risk of earnings cuts in the next 2 quarters? NO

  • We see little risk of cuts to our earnings forecasts in the near term as operating costs from new hospitals/clinics and specialists have been well managed (within guidance) and largely accounted for in our forecasts. There is higher earnings risk in 2020F if patient ramp-up turns out to be slower than expected.


Stock preference: HMI most preferred, Q&M the least

  • HMI is our preferred pick in the healthcare sector premised on FY20-21F EPS recovery (narrowing start-up losses) and steep valuation discount to sector average. See report: Health Management International - 3QFY6/19 Patience Needed For StarMed.
  • We maintain a HOLD call for Raffles Medical Group pending greater earnings visibility (possible bottoming out in FY2020F), which is also premised on its high 33x FY20F P/E and one more hospital opening in Shanghai in 2020. See report: Raffles Medical Group - 1Q19 Chongqing’s EBITDA loss in line.
  • TalkMed offers 3-4% dividend yield, strong net cash position and FY19F earnings recovery, but we keep the stock at HOLD mainly due to its above-industry-average valuation.
  • Q & M Dental remains our least preferred given its lacklustre earnings (1Q19: - 20% y-o-y) and more expensive trading valuation.
  • The sector is trading at 1 s.d. above 15-year historical mean. In our view, healthcare is one of the more expensive sectors in Singapore, especially given the limited positive catalysts and near-term gestation costs. The sector remains an Underweight pending a more visible earnings turnaround.


See also






NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.190 SAME 1.190
ADD MAINTAIN ADD 0.680 SAME 0.680
HOLD MAINTAIN HOLD 0.680 SAME 0.680
REDUCE MAINTAIN REDUCE 0.470 SAME 0.470



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