Raffles Medical Group Ltd - Ready for hurdle-crossing

26 Feb 2020

4Q revenue grew 6.7% YoY, in line with estimates. Full year contribution from both Healthcare Services and Hospital Services divisions grew at healthy levels of 8% YoY and 5.0% YoY respectively.
FY19 EBITDA grew a modest 2.8% YoY despite drag from gestation costs related to opening of RafflesHospital Chongqing.
Covid-19 outbreak may cause delay to the opening of RafflesHospital Shanghai, possibly extending gestation period.
Despite investment in China, RFMD maintains a strong net cash position of $150.7mn
We maintain our NEUTRAL recommendation with a revised TP of S$99. Near-term drag on business is likely but recovery expected to be swift on intact long-term positive outlook.

The Positives

+ Sustaining strong revenue growth. Healthcare Services revenue grew 9.0% YoY as the company expanded its network of corporate clients and increased the scope of services on both existing and new insurance contracts. A higher patient load also led to a 5.9% growth in the Hospital Services division YoY. Revenue growth has experienced 8 consecutive quarters of growth and is expected to buck the trend in 2020 with expected opening of RafflesHospital Shanghai during the year.

+ Recorded strong cash position of $150.7mn (+43% YoY). Strong cash flow from operations boosted group’s financial position despite payment of $98.5mn for fixed assets under development and capital expenditure incurred in 2019. Together with existing un-used credit facilities, the group has built up sufficient capital buffer to see through short-term uncertainties.

The Negatives

– Pressure from gestation losses in China remain. Despite EBITDA growing a modest 2.8% YoY, gestation losses continue to weigh in on earnings. RafflesHospital Chongqing incurred $9.2mn of gestation losses for FY19, resulting in in a NPAT decrease of 14.5% YoY by the group to $9.2mn. Nevertheless, the group is tracking the previously estimated EBITDA losses. Gestation losses from RafflesHospital Chongqing is expected to narrow to $4 – 6mn in FY20 but slated opening of RafflesHospital Shanghai will likely offset decrease in EBITDA losses.

Outlook

Uncertainty arising from Covid-19 outbreak on earnings. Patients may delay elective treatments, causing a short-term drag on revenues in the immediate quarter. This precludes prolongation of the virus outbreak.

China – Chongqing and Shanghai hospitals

Apart from narrowing gestation costs, RafflesHospital Chongqing has also obtained approval to be covered under Yibao, China’s social health insurance scheme. The expansion in scope for Yibao coverage to include cash top-ups as co-payments will allow the hospital to have flexibility in opening up more beds capacity to cater for increased demand without compromising on margins.

RafflesHospital Shanghai’s opening was slated in 2Q20. However, with the Covid-19 outbreak, opening of the hospital might be delayed until normalcy returns. This may extend gestation period and increase related costs. Nevertheless, with a higher expatriate population covered under commercial insurance, the hospital may also observe faster filling of capacity as utilisation will be less contingent on acquisition of Yibao coverage.

Maintain NEUTRAL with revised TP of S$0.99 (previous TP S$1.05).

China will continue weighing on the Group’s business in the next 1-2 years. Short-term headwinds arising from the Covid-19 may also reduce patient load from the delay in elective treatments. This may cause strain on revenue to similar extent as the 2003 SARS outbreak which saw 2 quarters of business slowdown.