Raffles Medical Group - UOB Kay Hian 2021-07-27: 1H21 Above Expectations; Boosted By Testing and Shots

RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - 1H21 Above Expectations; Boosted By Testing and Shots

Raffles Medical Group (SGX:BSL) reported 1H21 net profit of S$39.4m, up 129% y-o-y from a low base. While the group benefitted from COVID-19-related services, including vaccination centres and testing services, domestic operations were also impressively steady. The group continues to grow its China operations gradually with the opening of the Shanghai hospital, which we view favourably given its potential for intensity.
Maintain BUY with a higher DCF-based target price of S$1.43.

Raffles Medical Group announced 1H21 earnings of S$39.4m, up 129% y-o-y, forming 62% of our full-year forecasts, and above expectations.
The strong y-o-y growth was largely from a low base (recall that 2Q20 saw the effects of circuit breaker measures) as well as COVID-19-related services from testing and vaccination centres.
No interim dividend was declared as Raffles Medical intends to consolidate interim and final dividends from 2021. On a h-o-h basis, the group’s PATMI declined 19%.

1H21 revenue rose 42% y-o-y as Raffles Medical actively supported the government in its COVID-19 vaccination and Polymerase Chain Reaction (PCR) swab tests initiatives.
Revenue for the hospital services segment registered an increase of 35% y-o-y to S$171.4m in 1H21, while revenue for healthcare services registered a growth of 65% y-o-y to S$206.0m in 1H21.

Staff cost was up 34% y-o-y in 1H21 while inventories and consumables was also up 44% y-o-y mainly attributed to costs incurred for supporting COVID-19 projects.
Other income dipped to S$7.4m, down 56% y-o-y due to lower government grants.
Overall, operating margin was up 6.2ppt y-o-y to 16.3% in 1H21 (2H20: 19.6%).

Management noted that the Chongqing hospital is still on track for EBITDA loss guidance of S$5-6m in 2021, with an improving performance expected in 2H21. Greater China’s 1H21 revenue was up S$4m (+21% h-o-h), as clinics in China have also stepped up and participated in the local government’s COVID-19 vaccination efforts.
Raffles Medical started receiving patients for the Shanghai hospital on 26 Jul 21, with only 100 beds slated for use at the beginning. The hospital will provide for a comprehensive suite of medical services with a capacity of 400 beds. Management noted that expat population have returned to some extent (though still below pre-COVID-19 levels), which could aid patient load at the hospital.
We are more positive on the Shanghai hospital’s prospects, given the potential for higher billing intensity. On a longer term basis, Raffles Medical's China hospitals will add almost 1,100 beds to the group’s operations, almost four times of its Singapore operations.

For 1H21, Raffles Medical operated 17 vaccination centres in Singapore; management expects vaccination centres to be decommissioned as vaccination rates increase. Booster shots, if required could be administered in clinics on an ongoing basis.
As for the COVID-19 testing, Raffles Medical has operated dedicated polymerase chain reaction (PCR) testing centres for those exposed to COVID-19 clusters as well as pre-departure swabbing for cruise passengers.
Looking forward, management still expects testing to remain though some softening in volumes could be expected. Volumes may be expected at air-borders and pre-event testing as Singapore progresses with its reopening.

Excluding COVID-19-related services, domestic operations continued to be resilient and came in slightly stronger than our expectations. Raffles Hospital’s emergency care collaboration programme allowed the group to take in additional patient load from public hospitals when they had to be temporarily closed. Some foreign patient load was admitted in 1H21, though they were admitted on a case by case basis.

We lift our earnings forecast to account for Raffles Medical's better domestic operations which appear to be largely unaffected by Phase 2 (Heightened Alert) measures. Earnings upside could arise from border reopening COVID-19 testing in which we have not factored a significant uplift yet.

Maintain BUY rating on Raffles Medical with a higher DCF-based target price of S$1.43 (WACC of 6.1% and terminal growth of 2.5%).
See
Currently, Raffles Medical still trades below peers’ average P/E of 47x 2021F, as well as below its 5-year mean EV/EBITDA of 21x.

Potential catalysts include:
1. M&As;
2. better-than-expected ramp-up of new hospitals in China, and
3. recovery in foreign patient load.

Lucas Teng UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2021-07-27

SGX Stock Analyst Report BUY MAINTAIN BUY 1.430 UP 1.270