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Analysts remain cautious on Raffles Medical as it remains infectious from Covid-19

Amala Balakrishner
Amala Balakrishner • 5 min read
Analysts remain cautious on Raffles Medical as it remains infectious from Covid-19
Analysts are maintaining a cautious stance on Raffles Medical Group following the announcement of its 1H2020 results on July 27.
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Analysts are maintaining a cautious stance on Raffles Medical Group following the announcement of its 1H2020 results on July 27.

In what RHB analyst Juliana Cai deems “results infected by Covid-19”, the group posted a 38.2% drop in earnings to $17.2 million. This comes on the back of a deferment in elective surgeries and a dip in foreign patients, particularly during the circuit breaker period in Singapore.

In China, the group was hit by a smaller patient load at its RafflesHospital Chongqing as well as the closure of clinics due to the movement restrictions imposed there.

Still, a further decline was mitigated by a 6.8% growth to its Healthcare Services division to $124.6 million, following an uptake in activities such as air-border screening, swabbing of migrant workers, teleconsulting services and support rendered to persons with Covid-19 at the Changi Exhibition Centre community care facility.

Overall, net profit plummeted 41.6% to $16.3 million in 1H2020, from the $27.9 million posted a year ago.

See: Raffles Medical posts 38.2% drop in 1H2020 earnings, but expects to "remain profitable" this year

To CGS-CIMB Securities analyst Ngoh Yi Sin, these results are “below expectations”. “1H2020 was a miss at 33% of our/consensus full-year forecasts,” she explains in a July 27 note.

Ngoh attributes the decline to higher operating expenses from Covid-19 initiatives such as: staff costs, outsourced services and personal protective equipment.

She adds that the closure of the group’s clinics in China had cost the group $14 - $15 million, without which net profits would have come in at $31.2 million for 2Q20, in line with the $32.3 million logged in 1Q20.

Still, she says a further decline in earnings was prevented by the receipt of $15.2 million from the Jobs Support Scheme (JSS) – a Singapore-government initiated wage credit and property tax rebate doled out to businesses to tide them through the Covid-19 pandemic. This pushed 2Q20 net profit to $9.7 million, ahead of the $7.5 million recorded in 1Q20, observes Ngoh.

Meanwhile, others such as analysts from OCBC’s Research team and RHB’s Cai call Raffles Medical’s performance “unsurprising”. They believe the road to recovery will likely be a bumpy one.

Says Cai, “according to the management, the group has seen an encouraging resumption of local patient load in both its Singapore and China hospitals to close to pre-Covid levels in June and July.”

As for international patients - who account for 25 – 30% of the group’s hospital services revenue – Cai cautions an unlikely recovery in the near future given the spread of the pandemic and the movement restrictions that are still in place.

The group is particularly reeling from the absence of Indonesian patients, who have historically been the highest group of medical tourists to Singapore. Cai reckons it will be awhile before these patients return as its unlikely that borders will reopen in the near term.

Time is also what is needed for the recovery of the group’s operations in China, muse analysts at OCBC.

“While the group has engaged patients via its digital platform during the Covid-19 outbreak and continues to invest and develop its digital platform, a gradual recovery trajectory remains the base case with time will be needed for normalcy to return and the expansion plans in China to play out”.

Similarly, “the commencement date of operations for Raffles Hospital Shanghai continues to hinge on Shanghai’s pace of normalisation, although opening preparations are underway,” they add.

To this end, analysts from OCBC are maintaining their “hold” calls and target price of 96 cents for Raffles Medical.

CGS-CIMB’s Ngoh also has a 96 cent call, but has downgraded her stance to “hold” from “add” previously. Down 1.4 cents from her previous 97.6 cent call, she believes the revised price gives the counter a 4.9% upside from the 91.5 cents it was trading at on July 27.

“We cut our FY20-22F EPS by 6.6-13.4% to reflect the ongoing headwinds facing medical tourism and delay in the Shanghai hospital’s opening (most likely FY21F). We think the improving local patient volume has been priced in, but with limited visibility on the return of foreign patients,” she mulls.

Similarly, Maybank Kim Eng analyst Lai Gene Lee, has also downgraded his stance to a “neutral” call at a target price of 99 cents. This, he says, gives the counter an 8% upside.

“Our new FY20E PATMI assumes a 53% HoH recovery, largely driven by the normalisation of local volumes, but offset by reduced government wage support and tapering in revenue from Covid-19-related services,” he says in a July 27 note.

“In our view, the key swing factor for Raffles Medical’s recovery profile is how quickly foreign patient revenue can be regained. We see the return of lockdown measures as a key earnings downside risk”.

This resonates with RHB’s Cai who has cut FY20-22F earnings by 13%, 13%, and 6% respectively.

She also has a “neutral” stance on the counter at a new target price of 91 cents. This she says, gives Raffles Medical a 1% downside from its 91.5 cent price on July 27.

As at 10.33am, shares of Raffles Medical were up 0.5 cents or 0.543% to 92.5 cents.

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