SINGAPORE (Oct 25): Healthcare provider Raffles Medical Group is expanding rapidly and analysts are divided on recommendations on its stock.

RMG launched its new Raffles Holland Village in June, and is expected to complete works on its Raffles Hospital extension in the second half of 2017.

Meanwhile, RMG’s joint-venture Shanghai Hospital is expected to be completed by late 2018.

Raffles Medical had also recently-acquired International SOS (ISOS), a healthcare provider with 10 clinics across China, Vietnam and Cambodia.

“With two new medical centres ramping up and two new hospitals coming on-stream over the next two years, we believe Raffles Medical’s growth potential is becoming exciting once again,” says RHB analyst Juliana Cai in a Tuesday report.

RHB is keeping its “buy” recommendation on Raffles Medical with a higher target price of $1.76, from $1.70 previously.

DBS Group Research warns that Raffles Medical might see slower growth ahead because of the expansions.

“We project growth over the next few years to be a tad slower than its historical average following gestation period from its expansion plans,” says DBS lead analyst Rachel Tan, adding that “the counter has reflected its growth potential”.

DBS is maintaining its “hold” recommendation on Raffles Medical with an unchanged target price of $1.43.

While RMG’s revenue for the quarter was up 17.5% at $199.3 million compared to $101.5 million the year before, the group’s rise in revenue growth was offset by a 23% increase in staff cost.

(See <a href="http://www.theedgemarkets.com.sg/sg/article/raffles-medical%E2%80%99s-3q-earnings-4-162-mil-higher-revenue">Raffles Medical’s 3Q earnings up 4% to $16.2 mil on higher revenue</a>)

“Staff cost continues to be under pressure due to recruitment for Holland V, made worse by the higher cost structure at ISOS,” says CIMB analyst Jonathan Seow. “Taking a 3-year view, we think the staff/cost revenue ratio should remain at an elevated level as the larger magnitude of the hospital extension further adds to cost pressure.”

CIMB is keeping its “reduce” rating on Raffles Medical, but increases its target price to $1.46, from $1.41 previously.

Taking into account the expanding business operations as well as the new medical centre in Raffles Holland V, UOB Kay Hian lead analyst Andrew Chow says it is “unsurprising” that RMG’s costs outpaced its revenue.

“Staff costs as a percentage of turnover rose to 51.5% in 9M16 compared with 49.8% in 9M15, owing to step up in recruitment to support expanding business operations,” Chow says.

In addition, RMG’s staff costs were burdened by higher cost structure at ISOS, with an estimated staff cost/turnover of 60% compared to 50% in Singapore operations. Chow says that excluding ISOS, Raffles Medical's operating profit in 3Q16 would have grown by 4.5% instead of 0.3%.

Maybank Kim Eng analyst John Cheong, however, believes that RMG’s 3Q performance is in line with expectations and that recent expansions are stacking up well.

“Local operations continued to grow steadily from various expansions,” says Cheong. “Management remains positive on its China expansion, due to the country’s underserved population and its incomplete healthcare system.”

Maybank is keeping Raffles Medical at “buy” and raising its target price marginally to $1.85, from $1.84 previously.

As at 3.22pm, Raffles Medical Group is trading 1.0% higher at $$1.52.

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Should Raffles Medical get a second opinion over its expansion plans?

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