Raffles Medical Group - DBS Research 2019-10-29: Start-up Costs Within Expectations

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RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - Start-up Costs Within Expectations

• Raffles Medical Group's 9M19 net profit fell 15% y-o-y; ex start-up losses EBITDA and NPAT would have grown 10% and 2.5% y-o-y respectively.
• 3Q19 NPAT (ex start-up losses) is estimated to have increased 5% y-o-y, the highest y-o-y growth in a quarter since 2015.
• Raffles Hospital Shanghai targets to open in 1H20 (likely in March/April 2020).
• Maintain HOLD; Target Price of S$1.12.

9M19 results impacted by start-up losses as expected, 3Q19 net profit (ex start-up losses) grew 5% y-o-y.

• RAFFLES MEDICAL GROUP (SGX:BSL)’s 9M19 net profit fell 15% y-o-y to S$42m; 70% of consensus’ and 68% of our FY19F estimates, mainly impacted by start-up losses from the newly opened Raffles Hospital Chongqing. Excluding the start-up losses, 9M19 EBITDA and NPAT would have grown 10% and 2.5% y-o-y respectively. The estimated amount of start-up losses for Raffles Hospital Chongqing was S$6.7m (S$8.1m after tax), at mid of the estimated range given by management of S$8- 10m. See Raffles Medical Announcements.
• Similarly, 3Q19 net profit fell 17% y-o-y to S$14m as 8% y-o-y revenue growth was offset by start-up losses. 3Q19 NPAT (ex start-up losses) is estimated to have increased 5% y-o-y, the highest y-o-y growth in a quarter since 2015.
• Raffles Medical Group's revenue growth was led by both healthcare services (+10% y-o-y) and hospital services (+7% y-o-y). The increased revenue in healthcare services division was due to winning more insurance contracts and corporate clients. Hospital services revenue continued to show steady growth q-o-q, mainly contributed by a higher number of patients (mostly local inpatients) and partially due to 3Q18’s low base (hospital services revenue fell 3.8% y-o-y). Revenue from foreign patients remained flat as demand stayed soft.
• Raffles Medical Group's 3Q19 EBITDA grew 1.4% y-o-y despite start-up losses from Raffles Hospital Chongqing. Excluding the start-up losses, EBITDA would have grown 12.1% y-o-y. The estimated start-up cost increased 13% q-o-q to S$2.6m vs S$2.3m in 2Q19 and S$1.8m in 1Q19 (after tax: +22% q-o-q to S$3.3m vs S$2.7m in 2Q19 vs S$2.1m in 1Q19).
• Raffles Medical Group's 9M19 EBITDA margin fell 1.1ppts y-o-y to 18.9% (vs 20% in 9M18) impacted by start-up losses. Excluding the start-up losses, EBITDA margin would have improved 0.6ppt y-o-y.
• Similarly, 3Q19 EBITDA margin (ex start-up losses) improved to 20.6% vs 19.8% in 3Q18, possibly due to higher contributions from hospital services.

Start-up costs/losses within expectations; Raffles Hospital Shanghai targets to open in 1H20.

• Raffles Hospital Chongqing opened and began operations on 2 January 2019. The hospital continues to build traction with the number of patients have increased to more than 1,000 per quarter vs 500 patients in the first quarter of operations, largely from outpatients. It is encouraging to note that about two-thirds of the patients are returning patients.
• Raffles Hospital Chongqing continues to reach out to corporate and private patients via its marketing and promotional activities.
• 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 is on track to complete by 4Q19; targets to open in 1H20 (likely in March/April 2020 vs 1Q20 previously). Recruitment for the hospital has started.
• Management plans to move some staff from Raffles Chongqing to Raffles Shanghai.

MCH has turned profitable since 4Q18.

• With the completion of the restructuring on some of the clinics within MCH’s portfolio, management expects to see strong growth and profitability from MCH moving forward in IndoChina and China as it implements the ongoing expansion plans.

Maintain HOLD rating; Target Price of S$1.12.

• We maintain our HOLD rating and Target Price of S$1.12. See Raffles Medical Share Price; Raffles Medical Target Price
• Raffles Medical's share price is currently at 29-31x FY19F-20F PE (at 1 standard deviation [SD] above historical average) and 21-22x FY19F-20F EV/EBITDA. While its share price may be at the upper band of its historical range, this is a result of a lower earnings base arising from gestation losses, which we believe is already well expected by the market, and could possibly be priced in. As a result, we believe downside risks are limited.
• In addition, 9M19 start-up losses are within management’s estimated range and a steady progressive growth from its Singapore hospital could help offset some start-up losses from its expansion in China.
• 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 existing / future acquisitions of hospitals.

Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-10-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.120 SAME 1.120