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Raffles Medical a 'buy' even though growth set to normalise once pandemic abates

Amala Balakrishner
Amala Balakrishner2/23/2022 12:11 PM GMT+08  • 4 min read
Raffles Medical a 'buy' even though growth set to normalise once pandemic abates
Ong, Jaiswal, and DBS’ Tan have posted “buy” calls on Raffles Medical at target prices of $1.50, $1.55 and $1.63 respectively.
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Analysts have taken a strong liking for Raffles Medical Group following its results for FY2021 ended Dec 31.

The healthcare services provider’s full-year earnings rose by 27.7% to $84.2 million, from $65.9 million in the year before, thanks to stronger revenue growth.

This is “in line with our expectations” and shows that the group is slowly transitioning to business as usual, RHB analyst Shekhar Jaiswal writes in a Feb 22 note.

Agreeing, DBS analyst Rachel Tan says that the group’s latest set of results – which is one of its best ones – came in above her estimates.

The strong results follow contributions from Covid-19-related services, which helped to mitigated the reduction in government grants from the Jobs Support Scheme and property tax rebate.

Going forward, Jaiswal expects revenue from Covid-19 related services to taper off in the next two quarters. This comes as Singapore’s default care management for Covid-19 patients has become home recovery, since most patients are either asymptomatic or have mild symptoms.

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As such, the government is looking to slowly close down the isolation and treatment facilities, such as the one operated by Raffles Medical.

Additionally, the group – which has been operating exclusive healthcare clinics offering the RT-PCR testing at the airport – is expected to take a hit from the simplification of testing protocols for vaccinated travelers entering Singapore. This is, as the expensive on-arrival RT-PCR test has been replaced with a cheaper supervised Antigen Rapid Test.

“We forecast Covid-19 support activities to taper off sequentially, especially its PCR test revenues as Singapore relaxes testing protocols for VTL (vaccinated travel lane) travelers,” notes Maybank analyst Eric Ong.

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Meanwhile, Ong reckons that the group’s operations in China may take a hit from the emergence of sporadic Covid-19 clusters.

For now, the management has guided that the breakeven for its Chongqing hospital is likely to be delayed by a year till 2022. In this time, its hospital in Shanghai – which commenced operations in mid-2021 – is expected to incur EBITDA (earnings before interest, depreciation and ammortisation) losses of $10 million this year, notes Ong.

In any case, he adds that the group’s three hospitals in China will continue to see improved patient loads with the easing of movement restrictions.

In FY2021, the group’s operations in China accounted for 7% of its total revenue. RHB’s Jaiswal is expecting “the China operations to see a steady ramp-up in revenue from 2H2022”.

To this end, he sees 2022 as a transition year for Raffles Medical “as the decline in Covid-19-related revenue should be partially offset by higher hospital revenue”.

In any case, Jaiswal adds that the easing of borders and resumption of international travel would see more of Raffles Medical’s patients from regional countries seeking treatment here.

For reference, hospital volumes in Singapore still some 10% below pre-Covid levels since foreign patients have yet to return.

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Even as some medical tourists have come here for emergency procedures, Jaiswal cautions that whether more patients come to Raffles Medical will depend on its “price competitiveness relative to regional peers”.

DBS’ Tan adds that the group stands to gain from the recovery of elective procedures here, which took a back seat during the height of the pandemic when hospital beds were limited.

Maybank’s Ong says that the Raffles Medical should benefit from the government’s move to restructure the local healthcare ecosystem to allow GPs (general practitioners) to play a greater role.

In this vein, Ong, Jaiswal, and Tan have posted “buy” calls on Raffles Medical.

“We cut our FY2022 – FY2024 Earnings Per Share by 8% to 12% due to lower contributions from Covid-19-related services and its China hospitals,” explains Ong. He adds that his $1.50 target price gives the group a 16% upside potential.

Jaiswal – who has a price target of $1.55 – has pencilled 5% to 8% lower profit estimate for 2022 to 2023.

“Our target price, which includes a 2.2% ESG premium, implies 40x 2022 price-to-earnings [for Raffles Medical] – in line with its peer average P/E,” he elaborates.

Meanwhile, Tan has “lowered [her] FY2022 to FY2023 earnings by 4% to 7% to factor in a slight delay in the opening of Raffles Hospital Shanghai and slightly lower Covid-19 related services contribution, given the recent change in protocols”.

The analyst is expecting P/E to be 32x and has a target price of $1.63.

As at 12.10pm on Feb 23, shares in Raffles Medical were trading down a cent or 0.18% at $1.22.

Cover image: file photo

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