SINGAPORE (Feb 26): Analysts are generally neutral on Raffles Medical Group (RMG) after the group yesterday announced that its FY18 earnings saw a slight 0.4% increase y-o-y to $71.1 million, while revenue grew 2.4% to $489.1 million.

The group is also recommending a final dividend of 2 cents per share.

<hr/><a href="https://www.theedgesingapore.com/raffles-medical-posts-04-rise-fy18-earnings-711-mil-recommends-2-cents-final-dividend">See: Raffles Medical posts 0.4% rise in FY18 earnings to $71.1 mil; recommends 2 cents final dividend</a><hr/>

DBS Group Research has upgraded its recommendation on RMG to “hold” from “fully valued” with an increased target price of $1.12 from $1.00 previously.

In a Tuesday report, analyst Rachel Tan says, “While share price may be trading at the upper band of its historical range, we believe it has priced in the gestation of its new hospitals in China and downside risks are limited based on our valuations, and given that FY19F-FY20F earnings have now factored in start-up losses from its new hospitals in China.”

On Feb 18, Singapore finance minister Heng Swee Keat announced the extension of the Community Health Assist Scheme (CHAS) and better health benefits for the Merdeka generation. The management that this increases the number of people that are subsidised as they seek medical treatment from the GP clinic network, which will bode well for the group’s healthcare services division.

Meanwhile, Raffles Hospital Chongqing has begun operations on Jan 2, and Tan expects the startup costs and losses to be incurred progressively in FY19.

“While we expect earnings could decline (though still profitable) during the gestation period of its new hospitals, we believe earnings estimates and share price has reflected the drop in earnings,” says Tan.

RHB continues to rate RMG “neutral” with a target price of $1.02.

The group’s management expects both of its hospitals in China to incur EBITDA losses of $8-10 million in the first 12 months of operations and $4-5 million in the second year, before reaching EBITDA breakeven in the third year.

In a Tuesday report, analyst Juliana Cai says. “As such, we expect results during FY19- 20 to take a dip from the levels achieved in FY18, before recovering in FY21F.”

The analyst has lowered FY19-20 forecasts to 2-5% due to a delay in cost recognitions.

Currently, only about 10-20% of the space in Raffles Medical extension, which is expected to complete by mid-2019, has been tenanted out. Hence, higher-than-expected rental income upon leasing out the available commercial and office space, could help mitigate the decline in profits from the new hospitals’ startup costs.

On the other hand, OCBC Investment Research is maintaining its “buy” call on RMG with a fair value estimate of $1.25.

In a Tuesday report, analyst Joseph Ng says that he is mindful that the Raffles Hospital Chongqing has only opened its doors for about two months, but believes that the management will maintain discipline in having 200 operational beds (out of 700) for the foreseeable future till demand warrants them to scale up.

“In Singapore, we note that management remains cautious about the outlook for foreign load, given the presence of other regional alternatives,” adds Ng.

As at 4.35pm, shares in RMG are trading at $1.11 or 2.5 times FY19 book with a dividend yield of 2.2%.

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