Raffles Medical Group - OCBC Investment 2021-11-18: Improving Outlook


Raffles Medical Group - Improving Outlook

  • Expansion of vaccinated travel lane scheme and improving regional mobility should support a gradual recovery of foreign patients into Singapore.
  • Fair value estimate for Raffles Medical is lifted to S$1.65 as we update our estimates to reflect a firmer recovery outlook in FY22E.
  • Raffles Medical has a steady ESG rating since March 2019 for its ESG track record, which pegs it at the higher end of global industry ratings.

Gradual recovery of foreign patients into Singapore

  • Expansion of vaccinated travel lane (VTL) scheme and improving regional mobility should support a gradual recovery of foreign patients into Singapore – Singapore’s Ministry of Health has announced it will extend the VTL scheme to more countries starting 29th November 2021. VTLs will be launched with Indonesia, India, Malaysia, Finland and Sweden from end November, and with Qatar, Saudi Arabia and the United Arab Emirates (UAE) from 6th December 2021. Discussions are ongoing on the resumption of scheduled commercial passenger services with India, with targets to resume two daily VTL flights each from Chennai, Delhi and Mumbai by 29th November.
  • The upcoming VTL with Indonesia will start as a unilateral travel lane, with two daily designated services between Singapore and Jakarta which will be increased to four flights progressively. Applications for short term visitors and long term passes will open for Indian and Indonesian travellers from 22nd November, while those from the Qatar, UAE and Saudi Arabia can apply from 29th November.
  • The latest announcement brings the total number of countries in the VTL scheme from the current 13 countries to 18 countries (from 29th November) and 21 countries (from 6th December). Overall, we see the incremental easing of travel restrictions as a positive supporting Raffles Medical (SGX:BSL)’ medium term earnings outlook.

Near term revenue drivers

  • Near term revenue drivers from COVID-19 tests, pandemic treatment facility management and administering vaccinations should ease as regional economic activies normalize further in 2022E, barring any new major waves of COVID-19 - As a domestic healthcare provider, Raffles Medical has benefited during the pandemic from the re-opening efforts in Singapore through its vaccination centres, which has helped to offset weakness in its core healthcare businesses that had been impacted by the pandemic.
  • While Raffles Medical remains the key provider of COVID-19 PCR (polymerase chain reaction) tests at Changi Airport, the recent relaxation in travel requirements has also resulted in some share price correction given fewer PCR tests are likely to be required ahead. The local vaccination intensity has tapered off as Singapore achieved a high percentage of vaccinations (85% of total population achieved full/2 doses of vaccines, 21% has received boosters as of 17th November 2021), although testing demand at its clinics with the ongoing easing of border restrictions should still contribute to its earnings ahead.
  • Looking ahead, its earnings drivers should gradually shift back to its core businesses as the flow of both local (recovery of elective procedures) and foreign patients improve, while Raffles Hospital Chongqing is expected to achieve EBITDA breakeven in FY22E. Recent initiatives the firm has taken include an agreement with Trip.com effective 22nd October to provide swab and serology services for flights booked through the online travel platform. A COVID-19 treatment facility is also being set up at Raffles Hospital to cater for infected patients sent to its facilities.

Fair value raised to S$1.65

  • The increasing relaxation of travel restrictions into Singapore and further normalization of mobility and economic activities should be supportive of a gradual recovery of foreign patients in the new year, while local patients flow should also improve further as elective procedures normalise.
  • We have lifted our estimates to reflect a firmer recovery path for FY22E and raise our fair value estimate for Raffles Medical to S$1.65 (DCF estimates), which implies FY22E PER of 34.9x (close to +1 standard deviation to its past five year historical average multiple, reflecting a valuation multiple premium given its better than global sector average ESG rating).
  • Medium term potential catalysts for Raffles Medical include an earlier than expected ramp-up and EBITDA breakeven for its Chongqing hospital (likely by 2022E) and thereafter for its new Shanghai hospital as the group continues to grow its scale and ramp up operations in China, as well as the eventual normalization of foreign patients (which contributed up to a third of its patient load before the pandemic) as travel restrictions improve.
  • Raffles Medical is expected to report its full year results in February 2022. Key updates awaited include the status of its China operations (which was in the process of returning to normal as of its 1H results update), impact of recent COVID-19 resurgence in China and the medical tourism recovery outlook ahead.

Raffles Medical Group - ESG updates

  • Steady ESG rating over the past two years (higher than sector median rating), supported by Raffles Medical’s steady management of key ESG parameters, particularly related to upholding positive employee relations (employment management initiatives such as skills development through Raffles Healthcare Institute) and maintaining strong quality management systems (accredited by the Joint Commission InternationaL SINCE 2008).
  • With its growing presence in China however, there is an observation by ESG that more comprehensive anti-corruption policies and compliance mechanisms may be required to mitigate increased business risks although it is noted that Raffles Medical has not received any significant regulatory warnings over the past three years (as of February 2020).
  • Limited data protection programs and policies has also been an area flagged out for potential improvement, given it handles sensitive patient information and is exposed to data security risks.
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-11-18
SGX Stock Analyst Report BUY MAINTAIN BUY 1.65 UP 1.150