Raffles Medical Group - CGS-CIMB Research 2019-06-10: Nursing A Cold, But Recovery On The Horizon


Raffles Medical Group - Nursing A Cold, But Recovery On The Horizon

  • We estimate that 2Q-4Q19F EBITDA losses would be similar to the S$1.8m loss in 1Q19 and meet full-year guidance of S$8m-10m EBITDA loss.
  • Raffles Medical Group’s hub-and-spoke model, expanding insurance network and active brand awareness campaigns could overcome challenges to patients.
  • FY19F earnings trough and valuation of 31x FY20F P/E keep us at HOLD.

Decent start to FY19F exemplifies cost execution

  • We think RAFFLES MEDICAL GROUP LTD (SGX:BSL)’s 1Q19 EBITDA loss of S$1.8m (S$2.2m net loss) from the newly-opened 700-bed Chongqing hospital was commendable, within management’s first-year loss guidance of S$8m-10m.
  • Although Raffles Chongqing Hospital is its first major overseas project, Raffles Medical Group exercised cost discipline by keeping its staff force lean at 200 (c.15% seconded from Singapore) and opening beds in phases in tandem with demand. With strong cost controls, we believe delivery of revenue growth will be the next catalyst.

Mixed takeaways from our recent channel checks

  • We visited its new hospital in China and came away positive on Raffles Medical Group’s long-term prospects.
  • Chongqing boasts a population of 30m, has limited private healthcare options and stands to prosper from the “Belt and Road” initiative. Raffles Chongqing Hospital is in Liangjiang New Area (third national development approved by the State Council), close to eight developing strategic industries but far from the city centre and major residential areas. This could hamper Raffles Medical Group’s efforts to attract patient volumes in the initial years.

Steps in the right direction

  • Apart from building its insurer panel and capitalising on its international network of more than 10 clinics (some in Chinese cities), Raffles Medical Group is actively raising market awareness by organising health talks and offering promotional rates for its health packages. It has sponsored sports events, participated in foreign embassy open days and visited international schools, which we view as meaningful steps to tackle near-term challenges.

Higher FY19-21F EPS by 4.9-5.2%

  • We were previously cautious on Raffles Medical Group’s cost management, but now raise our FY19-21F EPS by 4.9-5.2% after its 1Q19 results.

Valuation still unattractive, maintain HOLD

  • Raffles Medical Group now trades at 31x FY20F P/E, less than 10% below its 5-year historical mean of 34x and above the regional industry average of 29x, which we deem expensive given its lacklustre earnings. Our recommendation for RFMD is HOLD.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.10 DOWN 1.190