Raffles Medical Group - DBS Research 2019-07-30: Better Grip On Costs

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

Raffles Medical Group - Better Grip On Costs

  • RAFFLES MEDICAL GROUP (SGX:BSL)'s 1H19 net profit -15% y-o-y; but excluding start-up losses, EBITDA and NPAT would have increased 9.3% and 1.2% y-o-y respectively.
  • Raffles Hospital Chongqing losses at lower end of estimated range; better than management’s expectations.
  • Both hospital and healthcare achieved good growth.
  • Declared interim dividend of 0.5 Scts; flat y-o-y.



Maintain HOLD, Target Price of S$1.12.

  • While Raffles Medical Group’s share price may be at the upper band of its historical range, we believe it has priced in the gestation of its new hospitals in China.
  • 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 to decline (though still profitable) during the gestation period of its new hospitals, we believe that earnings estimates and current share price has reflected this drop in earnings.


Potential Catalysts:

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


WHAT’S NEW - Better grip on costs


1H19 results impacted by start-up losses, operating costs of new hospital were “significantly lower than anticipated”; EBITDA rose 0.3% y-o-y nevertheless.

  • Raffles Medical Group’s 1H19 net profit fell 15% y-o-y to S$28m; marginally below our and consensus FY19 estimates, mainly impacted by start-up losses from the newly opened Raffles Hospital Chongqing. Excluding the start-up losses, 1H19 EBITDA and NPAT would have grown 9.3% and 1.2% y-o-y respectively.
  • The estimated amount of start-up losses for Raffles Hospital Chongqing was S$4.1m (S$4.8m after tax), at the lower end of the estimated range by management of S$8-10m. According to management, operating costs thus far were “significantly lower than anticipated”, mainly from manpower costs.
  • Similarly, 2Q19 net profit fell 16% y-o-y to S$14m despite 6% y-o-y revenue growth as it was offset by start-up losses. Revenue growth was led by both healthcare services (+7% y-o-y) and hospital services (+3% y-o-y). The increased revenue in healthcare services division was due to securing more insurance contracts and corporate clients. Hospital services revenue continued to show steady growth q-o-q, mainly contributed by patient growth (mostly local inpatients) and partially due to low base in 2Q18 (hospital services revenue fell 2.3% y-o-y). Revenue from foreign patients remained flat as demand stayed soft.
  • Raffles Medical Group's 2Q19 EBITDA grew 0.3% y-o-y despite start-up losses from Raffles Hospital Chongqing. Excluding the start-up losses, EBITDA would have grown 9.3% y-o-y. The estimated start-up cost increased 28% q-o-q to S$2.3m vs S$1.8m in 1Q19 (after tax: +29% q-o-q to S$2.7m vs S$2.1m in 1Q19). The higher costs were mainly due to marketing and promotional activities to advertise the new hospital.
  • 1H19 EBITDA margin fell 1ppt y-o-y to 19% (vs 20% in 1H18) impacted by start-up losses. Excluding the start-up losses, EBITDA margin would have improved 0.6ppt y-o-y. Raffles Medical has declared an interim dividend of 0.5 Scts, flat y-o-y.
  • Raffles Medical Group went into a net debt position for the first time in 4Q18 at S$11m and the figure continued to increase to S$23m as at 2Q19, as the company raised its capex to expand its businesses. However, net gearing level is low and healthy as the group generates strong positive operating cashflow.
  • We expect net gearing to increase as it invests in its two new hospitals.

Raffles Hospital Chonqging opened on 2 January 2019; start-up costs/losses better than expected.

  • Raffles Hospital Chongqing opened and began operations on 2 January 2019. The hospital started with 150 operational beds and hired c.40 specialists (50% local and 50% international doctors). While it is still too early for management to disclose operational metrics, the hospital has been receiving a fair number of walk-in patients (50%) with revenue contributions largely from outpatients.
  • Raffles Hospital Chongqing continues to reach out to corporate and private patients via its marketing and promotional activities. The hospital is currently running promotions on its services to introduce its hospital services to the local community.
  • Given that Raffles Medical Group has successfully managed the operating costs for Raffles Hospital Chongqing better than expected in the past half-year since opening, the momentum of increase in start-up costs could moderate in 2H19 until the ramp-up quickens.

Raffles Hospital Shanghai on track to complete by 4Q19; targets to open in 1Q20.

  • The construction works on Raffles Hospital Shanghai remain on track. On 24 May 2019, the group hosted a topping out ceremony to mark the completion of the building structure. The building is currently being fitted out with the curtain wall and interior fit-out works are ongoing.
  • Management targets to commence operations in 1Q20. Preparatory works for commissioning and operational phase has begun in Singapore since 1Q19.

MCH sees strong growth and profitability in IndoChina and Beijing; ongoing expansion plans.

  • MCH had turned profitable in 4Q18 and remains to be profitable. According to management, they have seen strong growth especially in IndoChina and Beijing.
  • Management continues to expand its clinic outreach in China with a second clinic opened in Nanjing and has plans to expand in Beijing.


Maintain HOLD rating; Target Price of S$1.12.

  • We maintain our HOLD rating and Target Price of S$1.12.
  • Raffles Medical Group’s share price is currently at 30-32x FY19F-20F PE (at 1 standard deviation [SD] above historical average) and 21-23x FY19F-20F EV/EBITDA. While its share price may be at the upper band of its historical range, we believe it has priced in the gestation of its new hospitals in China.
  • 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, 1H19 start-up losses are at the lower end of management’s estimated range and 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 start to increase materially, this could impact our earnings forecasts and rating.
  • Potential re-rating catalysts are:
    • better-than-expected ramp-up of new projects/integration process,
    • stronger-than-expected earnings growth from existing operations, and
    • 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/ 2019-07-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.120 SAME 1.120



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