SINGAPORE (Sept 29): Daiwa Capital Markets is keeping its “hold” rating on Raffles Medical Group RMG) at an unchanged target price of $1.57 as the group continues its press ahead with its expansion plans.

“Our recent discussion with Raffles Medical Group (RMG) suggests that the company continues to make steady progress on its various expansion initiatives,” says Daiwa analyst Jame Osman in a Wednesday report.

According to the group’s management, its Holland Village development Raffles Holland V, which is slated for an official opening on Oct 21, has achieved a committed occupancy rate of 93% versus 60% in 2Q with an estimated gross rental yield of around 5%.

(See also: Raffles Medical Centre - Holland V opens for business)

The management has also reaffirmed that its Bugis hospital extension plans are on track for completion in 2H17, says the analyst.  

Considering RMG’s “relatively steady” overall patient volumes at the moment, Daiwa continues to expect its revenue growth to be driven by its healthcare services segment as the group progressively ramps-up in utilisation at its newer facilities, such as at Shaw Centre and the re-branded ISOS clinics.

(See also: Raffles Medical’s 2Q earnings rise 4.5% to $16.7 mil on higher patient load)

(See also: Raffles Medical weighed down by costs in 2Q, still confident of growth)

“However, we believe cost pressures associated with the execution of these plans could weigh on near-term profitability,” Osman warns.   

“While we like RMG’s early transformational initiatives to develop into a regional healthcare operator, the stock is currently trading at a 2016E PER of 35.9x, which we believe fully captures the potential upside of the company’s domestic and overseas expansion plans,” he adds.   

The analyst also highlights how the company’s 2016-2017 Bloomberg consensus EPS forecasts have been cut by 14-17% over the past 12 months, and this is likely to “reflect expectations of cost pressures in the near-term”.

Lastly, Osman says he sees downside risks to Daiwa’s 2016 staff cost assumptions as the group “appears to be building up a dedicated team in China for business development and marketing activities” prior to its opening of its Shanghai hospital, which it aims to complete construction for by end-2018.   

“Any announcement of firm plans to develop new hospitals in China would represent an upside risk, while execution risks including major delays in its existing expansion plans would be the key downside risk,” he concludes.   

As at 3:55pm, shares of Raffles Medical are trading 0.33% higher at $1.53.