Raffles Medical Group - CGS-CIMB Research 2019-10-29: Winning Road To Recovery

RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - Winning Road To Recovery

Raffles Medical Group’s 9M19 earnings decline due to gestation costs was expected. Key positives were better domestic topline growth and Chongqing’s tight cost execution.
We think earnings could bottom in FY19F, premised on Chongqing’s narrowing loss in FY20F and a slight delay in opening of Shanghai hospital.
Upgrade from Hold to ADD with higher EPS estimates and undemanding valuation (1 s.d. below historical average).

Raffles Medical Group (SGX:BSL) reported 3Q19 core PATMI of S$13.6m, which fell 16.9% y-o-y, mainly due to gestation costs from its Chongqing hospital. 9M19 core PATMI of S$41.5m (-15.4% y-o-y) was 73%/69% of our/consensus FY19 forecasts, which we deem in line as 4Q is seasonally stronger. See Raffles Medical Announcements; Raffles Medical Latest News.
Excluding the impact of the Chongqing hospital, 3Q19 EBITDA would have grown 12.1% y-o-y to S$26.8m and net profit would have improved by 4.8% y-o-y to S$17.2m.

3Q19 saw the strongest topline growth of 7.8% y-o-y since 2017, driven by a 9.5% rise in healthcare services (more insurance contracts and corporate clients), as well as a 7.0% increase in hospital services (higher local patient load).
We think the ageing demographics of the resident population, coupled with higher rental income from Raffles’ new extension, could underpin profit growth from its Singapore operations.

We believe Raffles Medical Group’s first overseas hospital continues to ramp up well in Chongqing, even as quarterly EBITDA losses crept up (1Q19: -S$1.8m, 2Q19: - S$2.3m, 3Q19: -S$2.6m) due to the hiring of additional staff, but this remains within management’s full-year guidance. This is supported by Raffles Medical Group’s network of corporate clients, tie-ups with embassies and insurers, as well as its expanding chain of clinics in key cities in Chinasuch as Beijing, Shanghai, Tianjin, Nanjing, Dalian Anshen and possibly Hangzhou.
We also saw an improving patient load and case mix for Chongqing hospital in 3Q19, which could further benefit from Yibao volumes upon the official launch at end-2019 or early-2020.
For the 400-bed Shanghai hospital (in which it holds a 60% stake), we understand that the building structure was completed in May 2019, with interior fit-out and purchase of major equipment expected to be finalised by end-2019. Recruitment for specialists and support staff has commenced, with possible dual-hatting or relocation of some 30-40 staff from the Chongqing hospital. This, coupled with a phased opening of 150 beds, could help Raffles Medical Group manage its start-up losses in FY20F.

As we raise our FY19-21F EPS by 0.1-4.7% on lower opex assumptions, and roll over valuation to end-FY20F, our SOP-based Target Price is now higher at S$1.16. See Raffles Medical Share Price. See attached PDF report for SOP valuation details.
While there is no change to the three-year EBITDA breakeven period for both its hospitals in China, we see upside potential to management’s initial guidance of S$8m-10m EBITDA loss for its first year of operations, and S$4m-5m EBITDA loss for its second year of operations, based on a faster ramp-up at the Chongqing hospital (higher patient volumes due to the implementation of Yibao) and a slight delay in the opening of the Shanghai hospital (possibly Mar/Apr 2020).
We upgrade the stock from Hold to ADD, given that Raffles Medical Group currently trades at 30.8x FY20F P/E (1 s.d. below historical average) and earnings could bottom out in FY19F.
Poor overseas execution and unfavourable policy changes could pose downside risks to our ADD rating.
Potential earnings upside and share price catalysts could stem from stronger domestic growth, faster ramp-up of Chongqing operations, and a delay in the opening of the Shanghai hospital.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-29

SGX Stock Analyst Report ADD UPGRADE HOLD 1.16 UP 1.100