Analysts positive on Raffles Medical amid stronger-than-expected recovery for 3QFY2022

Chloe Lim
4-min read
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For 3QFY2022, the group reported revenue growth of 6.5% y-o-y to $199.5 million

Analysts are positive on Raffles Medical Group in light of strong 9MFY2022 ended September results with a net profit growth of $98.2 million, up 57.3% y-o-y.

DBS Group Research analyst Rachel Tan has kept a “buy” rating on Raffles Medical with an unchanged target price of $1.64.

For 3QFY2022, the group reported revenue growth of 6.5% y-o-y to $199.5 million while net profit surged by 62.1% y-o-y to $38.3 million.

“Raffles Medical, as the largest Covid-19 service provider, will continue to support the government’s Covid-19 initiatives in the community,” writes the analyst. While this has tapered as Singapore transits to living with Covid-19, the bed crunch in public hospitals may also benefit as a partner of the Ministry of Health (MOH) on the Emergency Care Collaboration programme, particularly with the onset of the Omicron XBB wave, Tan observes.

To Tan, Raffles Medical stands to benefit from the recovery of elective procedures and the return of medical tourism in Singapore’s “new normal”, to offset some tapering of Covid-19-related services.

“Given the company’s record-high FY2021 results, we expect earnings to stay elevated, despite China hospitals’ gestation losses, with some pent-up demand coming in from postponed elective procedures and foreign patients,” she adds.

On the whole, the analyst believes that Raffles Medical is on track to record stellar FY2022 results, with the strong earnings growth seen in 9MFY2022 will continue for the rest of the year.

Tan notes that Raffles Medical is currently trading at very attractive levels with FY2023 P/E of 19x, close to -1.5 standard deviation (s.d.) of its historical mean.

In her report, Tan acknowledges that DBS’s target price is the highest among her peers.

“We remain most positive among the consensus, maintaining our leading target price. Our FY2022-FY2024 earnings estimates are one of the highest versus the consensus, as we expect earnings to stay elevated, given the recovery of elective procedures and the return of medical tourism, while we await positive contributions from Raffles Hospital Chongqing and the rebound post the China lockdowns,” she says.

Meanwhile, Maybank Securities analyst Eric Ong has also kept a “buy” rating on the stock with an increased target price of $1.60 from $1.57.

The analyst raises his FY2022-FY2024 earnings per share (EPS) by 7%-13%, driven by better-than-expected core healthcare margins.

In spite of lower contribution from Covid-19 related services, Ong notes the group’s notable increase in revenue for 3QFY2022, underpinned by higher local pent-up demand for elective surgery) and foreign patient numbers, along with further reopening measures. “Notably, margins remain elevated on strong cost control and deployment of manpower, coupled with lower inventories and consumables used as well as a reduction in purchased and contracted services,” he adds.

According to management, outpatient volumes at its general practitioner (GP) clinics have already surpassed pre-pandemic levels amid the ongoing wave of Covid-19 infections driven by the Omicron XBB sub-variant. In particular, the analyst notes that the easing of the indoor mask requirement together with resumption of social and mass gatherings has also made it easier for common illnesses such as cold and flu to spread.

“We therefore think volume load and revenue intensity are likely to stay high, which should lead to better operating leverage and margins,” he adds.

At the same time, Raffles Medical is on track to open its first in-vitro fertilisation/assisted reproductive therapy centre in Hainan by 1QFY2023. The facility will complement its three existing China hospital offerings through forming a full life-cycle service chain within its O&G practices for its patients across China.

“While there are no clear signs of fundamental shift in China’s strict zero-Covid policy, we believe some tweaks may still be in the offing, and could possibly result in a shorter gestation period for its China operations," says Ong.

RHB Group Research analyst Shekhar Jaiswal has kept a “buy” rating on Raffles Medical with an increased target price of $1.65 from $1.60.

“On the back of a better-than-expected 9MFY2022 profit, we have adjusted FY2022 earnings by 33%,” writes Jaiswal. “We believe the moderation in margins could be more gradual in FY2023, and hence, adjust our FY2023-FY2024 earnings higher by 9%-12%.”

The analyst also rolls forward his valuation to FY2023.

In line with management’s guidance, the analyst believes that supply chain and labour constraints may lead to higher operating costs and negatively impact the group’s current elevated margin.

In addition, Jaiswal expects Raffles Medical’s China business, especially operations at its Shanghai hospital, to see a gradual ramp-up in operations in 2023. Management maintained that the Ebitda breakeven period for its China operations remains unchanged at two to three years, implying that the Shanghai hospital could make Ebitda losses from FY2023 to FY2025.

As at 3.27pm, shares in Raffles Medical are trading at 1 cent up or 0.75% higher at $1.34 at a FY2022 P/B ratio of 2.5x and dividend yield of 2.0% according to RHB’s estimates.

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