Raffles Medical Group - Transition Period To The Next Growth Phase


3Q15 results were in line with expectations, with net profit coming in at SGD15.7m (+1% YoY). Maintain BUY with a revised DCF-derived TP of SGD5.40 (23% upside). Profit growth was subdued by weaker economic conditions, as well as start-up costs for expansion projects. We believe the company is in a transition period to the next growth phase.

Soft quarter amid economic slowdown
3Q15 revenue was up 7.4% YoY, driven by hospital services, which grew 11.7% YoY. A slight decline in foreign patient load was offset by higher revenue intensity and volumes. On the other hand, the healthcare services (clinics) segment had one of its weakest quarters, recording just 3.5% YoY growth as corporates become more cost-conscious. A spike in staff cost in 1H15 appeared to have moderated somewhat, although overall profit was still dragged down by higher operating expenses, with the opening of a new medical centre at Shaw Centre in 3Q15.

Expansion plans on track
Holland Village development remains on track for opening in 1Q16, and management shared that there is already a strong tenant line-up (for non-clinical space). The project will be bottomline-positive from the start, due to rental collection from unutilised space. Raffles Hospital remains on track for 1H17 opening, while Shanghai Hospital project will have ground-breaking next month.

Increasing presence in China
Raffles Medical Group formed a joint venture (JV) (SGD34m investment) with International SOS, which will involve taking over and rebranding 10 clinics operating in China, Vietnam and Cambodia next year, before further expansion. The group’s strategy of targeting gateway cities in China will increase its direct presence in the country. In addition, the group recently opened a medical centre in Osaka city, Japan, which is a regional gateway city with increasing business and tourism linkages with Korea and China.

Technical Analysis
Daily Chart
Maintain BUY
We keep our earnings estimates mostly unchanged and maintain our BUY call, with a slightly lower DCF-derived TP of SGD5.40 (from SGD5.50). While earnings growth this year is likely to be subdued, we believe the company is in a transition phase with a giant leap to potentially greater profitability after FY17, when its major expansion plans are completed. (Read Report)

Read Related Reports
1) Idea Of The Day - Raffles Medical Group by Lim & Tan Research, published on 27 October 2015

2) Raffles Medical Group - Higher costs inevitable with expansion‏ by OCBC Investment Research, published on 27 October 2015

3) Raffles Medical Group - Results first take: uptick in hospital services by CIMB Research, published on 26 October 2015

4) Raffles Medical Group - Hospital growth driven by higher intensity by CIMB Research, published on 26 October 2015

5) Raffles Medical Group - Expanding at a measured pace by Daiwa Capital Markets, published on 26 October 2015

6) Raffles Medical Group - A Longer Time Horizon Needed by DBS Group Research, published on 26 October 2015

7) Raffles Medical - Expansion Quarter by Maybank Kim Eng Research, published on 26 October 2015

Source : RHB Research

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