Raffles Medical Group - UOB Kay Hian 2020-07-28: 1H20 Below Expectations; Healing In Progress.

RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - 1H20 Below Expectations; Healing In Progress.

Raffles Medical reported 1H20 net profit of S$17.2m down 38% y-o-y, below our expectations. 2H20 will likely see an improvement with the return of local patient load and elective healthcare services post circuit breaker. However, the recovery of foreign patient load remains uncertain, while the Chongqing Hospital could see an extended operating breakeven timeline.
The group still exhibits resilience through the provision of COVID-19 medical care services.

Raffles Medical (SGX:BSL) announced 1H20 earnings of S$17.2m, down 38.2% y-o-y, forming 36%/33% of our/consensus full-year forecasts, below expectations.
Interim dividend remained unchanged at 0.5 S cents/share, vs 1H19.
There was a slight improvement on a q-o-q basis for the group’s profit after tax in 2Q20 (S$8.8m vs S$7.5m in 1Q20).

Revenue for the hospital services segment registered a decrease of 14.5% y-o-y to S$126.6m in 1H20, as most elective surgeries were deferred. Excluding the China healthcare division, net profit after tax would have only decreased by 3.7% y-o-y, implying a net loss of approximately S$15m for the China healthcare division in 1H20.
The group has gradually seen an improvement in the China healthcare division, as hospitals and clinics in China have resumed operations with patient load returning to pre-COVID levels.

Raffles Medical was propped up by its participation in some of the COVID-19 measures, with it administering swabbing tests for foreign workers, as well as medical care for the government’s Changi Exhibition Centre-Community Care Facility for positive COVID-19 cases. Thanks to its involvement in these measures, the group’s healthcare services segment remained resilient, with revenue growing 6.8% y-o-y.
Support from the job support scheme, wage credit and property tax rebate amounted to a sizeable S$15.2m under other income for 1H20.

Barring another round of stay-home measures, medical services might have seen the worst effects of COVID-19 in 2Q20, as the circuit breaker measures in Singapore necessitated the closure of certain types of clinical services such as dental treatments, health screenings and other non-urgent consultations.
Management noted that since the end of the circuit breaker, local patient load has seen an improvement since mid-June, with the return of elective surgeries.

Foreign patients comprise approximately 20-30% of revenue for the group, which has been curtailed thus far. Foreign patient load would likely see an uncertain and potentially longer recovery period, given its dependence on air travel. The group has taken in additional patient load from public hospitals, though it comes with subsidized treatments and lower margins.

Management noted that the Chongqing Hospital had taken a hit in 1H20 due to the effects of COVID-19, and could prolong its operating breakeven timeline by a year. Fitting-out works and recruitment are in progress for the Shanghai Hospital, though the actual date of commencement of operations will depend on Shanghai’s return to normalcy.

We input a slightly deeper loss impact from Raffles Medical’s China healthcare segment as well as lower billing intensity from a protracted recovery in foreign patient load.
Maintain BUY with a lower DCF-based target price of S$1.07 (previously S$1.11) (WACC of 6.1% and terminal growth of 2.5%).
Raffles Medical remains well positioned, with a strong balance sheet and longer term benefits of expansion into China hospitals. In our view, local medical services remain resilient and provide some short-term relief.
See Raffles Medical Share Price; Raffles Medical Target Price; Raffles Medical Analyst Reports; Raffles Medical Dividend History; Raffles Medical Announcements; Raffles Medical Latest News.
Potential share price catalysts include:
1. faster-than-expected ramp-up of the new specialist centre,
2. better-than-expected ramp-up of new hospitals in China, and
3. recovery of foreign ent load.

Lucas Teng UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-28

SGX Stock Analyst Report BUY MAINTAIN BUY 1.07 DOWN 1.210