Raffles Medical Group - UOB Kay Hian 2022-08-02: 1H22 Outperformance Led By COVID-19 Revenue


Raffles Medical Group - 1H22 Outperformance Led By COVID-19 Revenue

  • Raffles Medical reported 1H22 PATMI of S$59.7m (+51.3% y-o-y), exceeding our expectations. Outperformance was led by the healthcare services segment, backed by higher clinic visitation rates and contributions from COVID-19 revenue.
  • Domestically, hospital patient loads are improving as foreign patients start to return while elective surgeries have ramped up. In China, continuous lockdowns have impacted operations, especially in Shanghai.
  • Upgrade Raffles Medical to BUY with a higher PE-based target price of S$1.42.

Raffles Medical's 1H22 results exceeded our expectations.

  • For 1H22, Raffles Medical Group (SGX:BSL)’s revenue (+11.2% y-o-y, +0.6% h-o-h) and PATMI (+51.3% y-o-y, +33.0% h-o-h) exceeded our expectations, forming 59.2% and 82.3% of our full-year forecasts respectively.
  • The strong outperformance was largely led by robust revenue growth and margin expansion in the healthcare services segment.
  • 1H22 operating margin expanded (+6.3ppt y-o-y, +5.4ppt h-o-h) due to a better product-mix from lesser PCR testing revenue and better cost efficiency from staff reallocation/lesser consumables used. As a result, PATMI margin also expanded (+4.1ppt y-o-y, +3.8ppt h-o-h).
  • Moving forward, with higher utilities and manpower costs, we reckon that Raffles Medical may increase prices to support margins.
  • Mixed segmental performance. Excluding intersegment revenue, 1H22 healthcare services revenue grew (+22.0% y-o-y, +4.4% h-o-h) while hospital services revenue was down (-5.0% y-o-y, -6.1% h-o-h). The increase in healthcare services revenue was a result of better COVID-19 revenue contributions and robust growth in medical clinic revenue.
  • Revenue from hospital services softened due to the removal of PCR testing revenue, mitigated by the return of foreign patients.
  • Revenue from China dropped by 4.0% h-o-h due in key cities such as Shanghai. However, on a y-o-y basis, Raffles Medical’s Chinese revenue grew by 5.2%.
  • Healthcare services: Star performer. Exceeding expectations, 1H22 healthcare services revenue formed 80.2% of our 2022 full-year segmental forecast, led by stronger-than-expected COVID-19 revenue from the Community Treatment Facilities (CTF) and higher outpatient clinic revenue. With relaxed social distancing measures, visitation rates at Raffles Medical’s clinics have already crossed pre-pandemic levels, further boosted by positive COVID-19 patients seeking medical attention.
  • Raffles Medical currently operates two out of six vaccination centres and all four of the CTFs in Singapore. As Singapore experienced a COVID-19 wave in 1H22, Raffles Medical saw improved COVID-19 revenue contribution from these services.
  • Based on our estimates, 1H22 COVID-19 revenue was at S$110m- S$120m. However, moving forward, management has noted that COVID-19 revenue from these services is expected to taper off as COVID-19 cases dwindle.
  • Hospital services: Recovery on track. 1H22 hospital services revenue formed 39.4% of our 2022 full-year segmental forecast, in line with expectations. As noted by management, Raffles Medical’s hospitals have experienced an increase in foreign patient load, currently at 60% of pre-pandemic levels. It is expected to improve further as Singapore’s international borders were only reopened in May 22.
  • Domestic patient load has also improved as more patients returned to perform delayed elective surgeries. We expect this segment to recover steadily with the return of higher-billing foreign patients and a ramp up in elective surgeries in 2H22. It was noted that the Emergency Care Collaboration Scheme has been extended for another 4-5 years.
  • China: Affected by zero-COVID policy. Raffles Medical’s Chinese operations were impacted as several areas went through stringent lockdowns, with Raffles Hospital Shanghai being the most impacted. Hospital staff and patients were unable to commute to the hospital, affecting operations and patient load, leading to around S$5m EBITDA loss in 1H22 for Raffles Hospital Shanghai. However, Raffles Hospital Chongqing managed to come out relatively unscathed as patient load doubled in 1H22, posting about S$1.5m EBITDA loss in 1H22 despite sporadic lockdowns.
  • We maintain our previous EBITDA breakeven level timeline for Chongqing at end-2H22 while pushing back our timeline for Raffles Hospital Shanghai to early-1H25.

Raffles Medical - Earnings forecast revision and recommendation

  • We increase our 2022-24 earnings estimates for Raffles Medical, after factoring in higher revenue and margin assumptions for the healthcare services segment. For 2022-24, we increase our PATMI estimates from S$108.7m (S$72.5m previously), S$87.2m (S$67.3m previously) and S$75.4m (S$74.6m previously) respectively. We expect earnings to trend downwards starting 2023 as COVID-19 revenue tapers off.
  • Upgrade Raffles Medical to BUY with a higher PE-based target price of S$1.42 (previously S$1.34). We have changed our methodology from DCF to a P/E valuation, pegged at -1.0 standard deviation (24.5x) of Raffles Medical’s long-term average mean P/E, due to uncertainty over Raffles Medical’s Chinese operations.
  • Due to expected record-high earnings in 2022, we have taken a conservative approach and pegged our P/E multiple to -1.0 standard deviation instead of its mean to account for normalisation of earnings in 2023-24.
  • Although Singapore’s government has been swift in its transition to endemic living, Raffles Medical’s COVID-19 revenue has been resilient, backed by sporadic COVID-19 waves in 1H22. With an ongoing recovery in domestic operations, this would help support Raffles Medical’s 2022-23 earnings and the tapering COVID-19 revenue, before hitting an inflection point in 2024-25 when Raffles Medical’s Chinese hospitals start to exit their gestation periods.
  • We still remain positive on Raffles Medical’s medium-term China expansion and think that there is upside at current price levels.
  • See
  • Catalysts:
    • Ramp-up of Chinese hospitals’ operations.
    • Relaxation in China’s zero-COVID policy.
    • Recovery in foreign patient load.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2022-08-02
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