Category: Raffles Medical

 

RafflesMed – OCBC

DOWNGRADE TO HOLD; TONING DOWN ASSUMPTIONS

  • Uncertainty over new Specialist Centre
  • Paring FY13F EPS estimate by 5%
  • No near-term impact from HK land tender

Delay over new Specialist Centre could shroud earnings visibility

Raffles Medical Group (RMG) is seeking to expand its capacity with a new Specialist Centre at 30 Bideford Road (~42,668 sf). However, we believe that there is still uncertainty over the possible commencement date of operations as the authorities had rejected its first application in Oct last year. We adopt a more conservative approach, and assume that the delay in operations would stretch until late 2013 or early 2014 (previously 1H13). We believe that there could also be a negative flowthrough effect to its Raffles Hospital as this new Specialist Centre was intended to act as an additional platform for referrals for follow-up diagnostic and treatment services. We thus trim our FY13F revenue and EPS estimates by 2.7% and 5.0%, respectively.

Awaiting results of private hospital land tender bid in HK

RMG is currently awaiting the results of its Hong Kong land tender bid for a private hospital development (submitted on 27 Jul 2012), with results expected to be announced in early 2013. Regardless of the outcome of the tender results, we opine that there would be no material near-term financial impact on RMG, given that this is a greenfield project and capex would take place in stages. We expect this project to be financed by RMG’s strong operating cashflow generation and debt.

Downgrade to HOLD on revised estimates and valuation grounds

RMG’s share price has performed commendably since we upgraded the stock to a ‘Buy’ on 10 Oct 2012 (please refer to our report titled “Time to Revisit This Stock”), jumping 18.2% against the STI’s 4.7% gain over the same period. We now downgrade RMG to HOLD, as we lower our fair value estimate from S$2.82 to S$2.68 as a result of our reduced projections, still pegged to 24x FY13F EPS.

RafflesMed – OCBC

DOWNGRADE TO HOLD; TONING DOWN ASSUMPTIONS

  • Uncertainty over new Specialist Centre
  • Paring FY13F EPS estimate by 5%
  • No near-term impact from HK land tender

Delay over new Specialist Centre could shroud earnings visibility

Raffles Medical Group (RMG) is seeking to expand its capacity with a new Specialist Centre at 30 Bideford Road (~42,668 sf). However, we believe that there is still uncertainty over the possible commencement date of operations as the authorities had rejected its first application in Oct last year. We adopt a more conservative approach, and assume that the delay in operations would stretch until late 2013 or early 2014 (previously 1H13). We believe that there could also be a negative flowthrough effect to its Raffles Hospital as this new Specialist Centre was intended to act as an additional platform for referrals for follow-up diagnostic and treatment services. We thus trim our FY13F revenue and EPS estimates by 2.7% and 5.0%, respectively.

Awaiting results of private hospital land tender bid in HK

RMG is currently awaiting the results of its Hong Kong land tender bid for a private hospital development (submitted on 27 Jul 2012), with results expected to be announced in early 2013. Regardless of the outcome of the tender results, we opine that there would be no material near-term financial impact on RMG, given that this is a greenfield project and capex would take place in stages. We expect this project to be financed by RMG’s strong operating cashflow generation and debt.

Downgrade to HOLD on revised estimates and valuation grounds

RMG’s share price has performed commendably since we upgraded the stock to a ‘Buy’ on 10 Oct 2012 (please refer to our report titled “Time to Revisit This Stock”), jumping 18.2% against the STI’s 4.7% gain over the same period. We now downgrade RMG to HOLD, as we lower our fair value estimate from S$2.82 to S$2.68 as a result of our reduced projections, still pegged to 24x FY13F EPS.

RafflesMed – CIMB

Silverlining beyond short-term

Two issues surfaced in this result announcement. Salary increases appear to be a trend while hiccups in approvals in the new Orchard Specialist Centre were a surprise. We believe the stage is still set for operating efficiency that can come forth with these factors addressed.

 

3Q12 result was 10% below our expectation with 3Q12 and 9M12 EPS forming 21% and 60% of our previous FY12 forecasts, respectively. FY12-14 EPS estimates are cut by 2-10% for new staff cost adjustments. Still based on 22x P/E (mid-cycle valuations), our target price rolled over to FY14 is higher. Outperform as operating efficiency resume.

Staff cost hikes in play

The slowdown in profit growth was due to the rampant increase in costs, rather than stagnating in revenue. Revenue showed healthy growth of 14% yoy to S$78.7m in 3Q12. Staff costs (+16.8% yoy) was the culprit in this result. The group is merely keeping pace with industry-wide salary increments and staff recruitment to meet its business expansion. In spite of that, EBIT did not suffer but grew 4.4% yoy to S$15m, with the EBIT margin stable at 19.2%.

But operation efficiency would resume

Staff currently deployed at the Singapore Prisons will be redeployed in the new year to other parts of the group as well as to new clinics and services that will be opened in 2013, thereby suggesting that there will be a slowdown in new hiring, reversing the trend of continuous salary increases. Operating efficiency should follow.

Bideford still on for 2013

The application for the change of use of the commercial podium at 30 Bideford Road for medical clinics has not been successful. Management assured us that the group will work with the relevant authorities to amend its plans so as to accommodate such concerns and the resubmission will come forth shortly. Our belief is that clinical operations would still commence sometime in the later part of 1H13, if not early-2H13.

RafflesMed – Kim Eng

Under-catering for growth

Below expectations. 3Q12 results were slightly below expectations as profit was hampered by cost pressure, especially on the wage front. There were also hiccups on the capacity expansion plans. While revenue growth is still strong currently, the delay is a worry, given that RMG is nearing its capacity limitations in its current single hospital.

Cost pressure resulted in slow profit growth. Despite healthy revenue growth of 14% for the quarter, bottomline was up only 7%, which is a similar trend for 9M12 figures. The main culprit was staff cost, which was up 17%. This is a crucial cost line, which historically made up almost 50% of revenue. There were two factors 1) New staff hired in anticipation of business in the new Thongsia Building 2) An impending 8-10% industry-wide adjustment for nursing and auxiliary staff in Singapore this year. There were also higher expenses generally across the board, such as purchased services and consumables.

Revenue growth remains strong. Both the hospital services and healthcare services (mainly clinics) showed similar growth. Management shared that the 15% growth for hospital services was driven equally by higher pricing and volume. We understand that in terms of pricing, public hospitals have recently caught up with RMG, hence management’s belief that there is pricing upside to mitigate cost increases going forward.

First application to convert Thongsia Building unsuccessful. The application for converting this building, which was purchased for SGD92m in 2011, has not been successful, presumably due to traffic concerns, although earlier discussions with Ministry of Health went smoothly. Management is still optimistic that operations will commence there by 2H13, and has prepared for a second application.

Conservative stance may now scupper growth. The delays at Thongsia Building (especially if 2nd application fails) and capacity expansion at Raffles Hospital imply management may have under-catered for volume growth. This may scupper profit growth going forward, which would result in a possible de-rating of the stock. We maintain HOLD, with a TP of SGD2.55, pegged to 22x FY13F PER.

RafflesMed – OCBC

TIME TO REVISIT THIS STOCK

  • Seasonal 2H strength to continue
  • Expect margin expansion in FY13
  • Trading at undeserved discount to major peers

Expect stronger 2H12 and FY13

We expect the seasonally stronger 2H trend for Raffles Medical Group (RMG) to continue in FY12, despite rising staff costs. This is supported by expected traction gains in its patient loads and room to raise charges, albeit on a gradual basis, given its competitive pricing vis-àvis its major peers. We forecast RMG’s 2H12 revenue and core earnings to increase 8.2% and 24.0% HoH to S$162.1m and S$29.8m, respectively. This also translates into a growth of 14.6% and 14.1% YoY, respectively. For FY13, we believe that the commencement of operations at its new Specialist Centre in 1H13 would help boost RMG’s net margin from 17.3% in FY12F to 17.7% in FY13F. This would be driven by improved economies of scale, increased referrals to its Raffles Hospital and better utilisation of manpower which were hired in preparation for its enlarged operations.

Favourable valuations vis-à-vis major peers

Based on forward PER valuations, RMG currently ranks as the second cheapest stock amongst its direct comparable peers from Singapore, Malaysia, India and Thailand, despite delivering the second highest estimated net margin, according to Bloomberg consensus data. We further conduct our analysis on the PER trends of RMG and its peers set, and note that the ratio of RMG’s PER relative to its peers’ average is currently at a 13.5% discount to their 5-year average.

Roll forward our valuations and upgrade to BUY

Since we downgraded RMG to ‘Hold’ on 24 Jul 2012, its share price has trended 4.3% downwards, underperforming the STI by 7.1%. While we are retaining our forecasts, we roll forward our valuations on RMG to 24x FY13F EPS. This correspondingly bumps up our fair value estimate from S$2.63 to S$2.82. Coupled with a dividend yield of 1.6% (FY13F), we upgrade RMG from Hold to BUY given potential total returns of 15.8%. Our upgrade is also reinforced by continued uncertainty over the macroeconomic backdrop, which we believe would provide an investment merit for defensive counters which also generate strong operating cashflows, such as RMG.