SINGAPORE (Jan 8): CIMB is maintaining its “add” call on Raffles Medical Group (RMG) with a target price of $1.24.
"We think 2018 will be the year when management executes on its Chongqing hospital," says analyst Ngoh Yi Sin in a Sunday report.
Ngoh expects the group to start incurring start-up costs from the opening of the Chongqing hospital in FY18 and its Shanghai hospital from FY19 onwards.
The analyst estimates a three-year EBITDA breakeven period and between $6 million and $13 million EBITDA loss per annum over FY18 to FY20 for the Chongqing hospital.
That's assuming a measured ramp-up in hospital beds from 300 initially and the gradual hiring of doctors and support staff.
In 2017, RMG's price declined by about 27%. Together with its current valuation of 19.9x CY19 EV/EBITDA, which is close to 1sd below its five-year historical mean, the analyst believes that the China concerns appear to be largely priced in.
“The multi-year earnings decline attributable to the gestation of the Chongqing and Shanghai hospitals is inevitable for longer term gain, in our view,” says Ngoh.
Currently, the group operates in two segments – healthcare and hospital services, which accounted for 44% and 56% of its FY16 topline respectively.
“We believe RMG is well positioned to ride on the secular trends of an ageing population, higher insurance penetration and increasing focus on primary care,” says Ngoh.
On the other hand, medical tourism has been showing signs of softening since FY14, as the group’s hospital revenue growth slowed to single digits, with foreign patients contributing to about 30% of its topline.
Nonetheless, Ngoh remains positive on the group’s local patient load which may provide a sustainable earning base, while near- to mid-term earnings uplift could come from more clinics, full rental contribution from Holland Village in FY18 and the upcoming Raffles Hospital Extension.
In addition, the group has also sought growth overseas, including the acquisition of Chongqing hospital, Shanghai hospital and Mayo clinics.
“Such exposure should allow the group to tap into the large and underserved market, as well as their increasing healthcare spending,” concludes Ngoh.
As at 12.10pm, shares in RMG are trading at $1.11 or 2.72 FY18 book with a dividend yield of 1.79%.
