Raffles Medical Group - UOB Kay Hian 2022-02-22: 2021 Above Expectations As COVID-19-related Earnings Peak


Raffles Medical Group - 2021 Above Expectations As COVID-19-related Earnings Peak

  • Raffles Medical reported a record-high PATMI of S$84.2m in 2021, up 27.7% y-o-y and beating our expectations, driven by a full-year’s revenue contribution from PCR swab tests and vaccinations centres.
  • Patient loads in China are improving as operations ramp up. Looking forward, Raffles Medical is set to face a sharp decline in COVID-19-related revenue.
  • We remain positive on Raffles Medical’s medium to long-term outlook but do not see any near-term catalysts. Downgrade to HOLD with a lower DCF-based target price of S$1.34.

Raffles Medical's 2021 earnings beat expectations.

  • Raffles Medical Group (SGX:BSL) announced robust 2021 revenue and PATMI of S$723.8m (+27.4% y-o-y) and S$84.2m (+27.7% y-o-y), forming 99.6% and 116.2% of our full-year forecasts respectively. The strong y-o-y growths in top-and bottom lines were largely driven by increased revenue from COVID-19-related services. 2021 staff costs increased 32.7% y-o-y, in tandem with revenue growth, as manpower demand surged due to higher polymerase chain reaction (PCR) testing volumes and vaccination centres.
  • Increased final dividend and improved balance sheet. A total final dividend of S$0.028 was declared for 2021, higher than S$0.025 in 2020, implying a full-year payout ratio of 62% of 2021 earnings. Due to strong operating cashflow, Raffles Medical now boasts a healthy net cash position of S$66.9m (net debt of S$1.8m) and a lower gross debt/EBITDA ratio of 1.23x (1.65x) as compared to last year.

COVID-19 services to taper off.

  • As Singapore transitions to endemic living, close to 94% of Singapore’s population is fully vaccinated with 66% already having received their booster shots. Also, Singapore’s government is slowly phasing out PCR tests in preference of antigen rapid tests (ART) as the Omicron variant appears to be milder than the previous variants. Raffles Medical expects service levels of its vaccination centres and PCR swab tests to start tapering off from 1Q22 and significantly phased out by 3Q/4Q22.
  • Healthcare services: All good things must come to an end. Continuing from 2020, healthcare services continued its outperformance, driven by COVID-19-related services. Excluding inter-segment revenue, 2021 revenue from healthcare services surged 59.5% y-o-y while profit before tax grew 149.2% y-o-y, driven by a full-year contribution of PCR swab tests and vaccination centres. However, we expect COVID-19-related revenue to drop considerably in 2022 (-53.7% y-o-y) as vaccination and PCR test demand dwindle. A revival in demand may come from a new lethal COVID-19 variant or a new multi-variant vaccine.
  • Removal of on-arrival PCR tests. Singapore has removed the requirement for on-arrival PCR testing (S$125) for VTL travellers starting 22 Feb 22, switching to the inexpensive supervised ARTs (S$25) instead. Although Raffles Medical does provide these ART services at its clinics, we expect its 2022 earnings to see a large impact as VTL travellers make up 80-90% of monthly international travellers and volumes for the exclusive higher-margin on-arrival PCR tests will fall sharply.
  • Although domestic Omicron outbreaks have supported local PCR test volumes, we reckon this will not be enough to stem the large decline in on-arrival PCR test volumes.

Hospital operations: Domestic recovery in progress.

  • Excluding inter-segment revenue, Raffles Medical's hospital services revenue softened slightly by 3.5% y-o-y due to the absence of higher-billing foreign medical tourists. Although a 2H21 recovery in local patient load helped recover back some lost utilisation, 2021 overall patient load fell as Singapore’s international borders remained closed, specifically to Raffles Medical’s key market Indonesia where most of Raffles Medical’s foreign tourists come from.
  • Raffles Medical expects some permanent foreign patient loss as foreign patients start acclimatising to their local providers. We expect this segment to recover gradually as Singapore recently announced new additional VTLs in Feb 22, including Indonesia.

China hospitals: Next core revenue driver.

  • Geographical revenue from China grew 43.7% y-o-y in 2021, which we reckon came largely from the Chinese hospitals. Management noted that the Chongqing Hospital saw an improvement in patient load in 2021, and expects EBITDA to breakeven in 2023, its fourth year of operations.
  • For the Shanghai hospital, a delay in getting relevant operating licenses had resulted in its EBITDA breakdown guidance being delayed to end-24. Also, the newly converted Beijing Hospital has begun accepting patients. Once the COVID-19 pandemic blows over, we opine that China’s ageing population and rising healthcare spending would provide favourable tailwinds for secular revenue growth.

Raffles Medical Group - Earnings forecast revision & investment recommendation

  • Cut our 2022 and 2023 earnings forecasts for Raffles Medical by 6.6% and 16.4% respectively and add our 2024 earnings estimates, on the back of a loss in on-arrival PCR testing volumes and COVID-19 related revenue. We expect Raffles Medical's 2022-24 PATMI of S$72.5m (S$77.6m previously), S$67.3m (S$80.5m previously) and S$74.6m respectively.
  • Downgrade Raffles Medical to HOLD with a lower DCF-based target price of S$1.34 (previously S$1.66). The lower target base is due to us rolling over our 10-year DCF forecasts to 2022 and lower free cash flow estimates for 2022 and 2023. We have decreased our WACC slightly from 6.0% to 5.8% given better clarity into Raffles Medical’s China operations.
  • We had originally viewed that Raffles Medical’s COVID-19-related revenue would help support Raffles Medical’s 2022 earnings, before hitting an inflection point in 2023-24 when Raffles Medical’s Chinese hospitals start to exit their gestation periods. However, Singapore’s government has been steadfast in its transition to endemic living, significantly affecting Raffles Medical’s short-term outlook.
  • Although we remain positive on Raffles Medical’s medium-term China expansion, we opine that lower COVID-19 related revenue would depress near-term share price performance and that there are no near-term catalysts to justify a higher target price. Thus, we think Raffles Medical is fairly valued at current price levels.
  • See
  • Catalyst: Ramp-up of Chinese hospitals operations and recovery in foreign patient load.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2022-02-22
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.34 DOWN 1.660