Raffles Medical Group Limited - Can it finance growth comfortably as interest rates rise?

7/4/2014 - Brokers are bullish on Raffles Medical due to growth prospects from expansion in Singapore and possibly in China.

Maybank Research has reiterated its BUY call with a consensus-topping target price of S$4.11.

The stock is the analyst's top pick in the Singapore healthcare sector.

CIMB Research has maintained its ADD rating and OCBC Research a BUY rating.

Both brokers have a target price of S$3.68.

Raffles Medical is optimistic about FY14, thanks to additional growth from expansion of medical centres at the Whitesands Shopping Centre, Bedok Mall and Jurong Point.

In the long run, growth will come from expansion in business, after Raffles Hospital is extended to its newly purchased land site.

In addition, it also completed the purchase of a 3-storey office building at Holland Village from DBS Bank Ltd in January, which will be redeveloped into a 5-storey commercial building consisting of medical clinics, retail shops, restaurants and car park.

Both projects will be completed in 2016.

The company just announced earnings for FY14:

Revenue: +9.4% to S$341 mln
Profit: +49.3% to S$84.9 mln
One-off gains/losses: S$20.4 mln vs Nil
Cash flow from operations: S$71.2 mln vs S$69.6 mln
Dividend: 5 cents per share vs 4.5 cents per share

Hospital Services registered revenue growth of 12.4% to S$231.3 mln, and Healthcare Services at 6.2% to S$124.5 mln.

The growth in revenue was due to more specialists joining the hospital, more patients treated, and higher number of patients needed more care.

It was also due to increased contributions from overseas operations and the provision of more healthcare insurance services.

Profit was boosted by S$3.9 mln of fair value gains in investment properties, and a S$20.4 mln gain from the sale of Thong Sia building.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Can it finance growth comfortably as interest rates rise?

Group's expected cash outflow in two years is about S$535 mln.

This includes the cost of the Holland Village property for S$54.8 mln, and redevelopment cost of about S$65 mln.

The other investment is related to the purchase of the site adjacent to the hospital for S$105.2 mln and the cost of construction of about S$310 mln.

This outflow is close to its total assets of S$573.4 mln as at FY13.

This shows that the company is on track to have a billion dollars' worth of assets.

But with a cash balance of just S$266 mln for the cost of development, dividend payment and the need for working capital, it looks like it will have to borrow money to pay for it all.

The company currently has no debt.

Question

2. Will Dr Loo Choon Yong dilute his stake?

Dr Loo Choon Yong has a direct interest of about 10% in Raffles Medical, and deemed interest of 42.3%.

Is he prepared to dilute his stake in a cash call?

Or is the company purely focused on raising debt, so that his stake is not diluted?

Question

3. Which property will it mortgage if it raises debt?

Or will it sell investment properties valued at S$100 mln?

Question

4. How is the discussion with the joint venture partners in China coming along?

Discussions to establish hospitals with Shanghai Lujiazui and China Merchant Group started in September 2013.

But we have no update since then.

Maybank Research highlights that the group hopes to build a bigger business in China than in Singapore.

(Total number of questions in the full story: 12)

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