Raffles Medical Group - UOB Kay Hian 2022-11-01: 3Q22 Strong Profitability, Driven By Better Cost Control

Raffles Medical Group - 3Q22 Strong Profitability, Driven By Better Cost Control

  • Raffles Medical’s 3Q22 net profit surged to S$38.3m (+62.1% y-o-y) from better cost efficiencies, exceeding our expectations.
  • Due to the relaxation of most COVID-19 measures, outpatient volumes at Raffles Medical’s local GP clinics have been robust. Raffles Medical is also benefitting from an ongoing COVID-19 wave as public hospitals face overwhelming patient volumes.
  • We remain positive on Raffles Medical’s expansion in China in the medium term. Maintain BUY with a higher PE-based target price of S$1.58 (S$1.42 previously).

Raffles Medical's 3Q22 above expectations.

  • For 3Q22, Raffles Medical Group (SGX:BSL)’s revenue (+6.5% y-o-y) and net profit (+62.1% y-o-y) surged past our expectations, with 9M22 revenue (+9.6% y-o-y) and net profit (+57.3% y-o-y) forming 79.3% and 90.3% of our full-year forecasts respectively.
  • The strong outperformance was led by the relaxation of most COVID-19 measures in Singapore and better cost efficiencies, which led to higher patient volumes and robust margin expansion. 3Q22 net profit margin expanded 6.6ppt y-o-y due to a better product mix from lesser PCR testing revenue, better cost efficiency from staff reallocation and lesser inventories/consumables used.
  • Moving forward, we expect Raffles Medical to continue its upward momentum as Singapore tackles a new COVID-19 wave and the gradual return of higher-billing foreign patients.
  • Rising outpatient volumes. We understand that current outpatient volumes at Raffles Medical’s local general practitioner (GP) clinics have been robust at above pre-pandemic levels, driven by increased COVID-19 cases from the new Omicron XBB sub-variant, patients with respiratory symptoms and increasing corporate patients as more workers return back to their respective workplaces.
  • As Singapore is facing a new COVID-19 wave, we reckon that contributions from this segment would continue to support and boost top-line growth in 4Q22.
  • Beneficiary of spillover demand. Because of the Emergency Care Collaboration programme, Raffles Medical has benefitted from overloaded public hospitals caused by the new COVID-19 variant, which contributed to Raffles Medical’s top-line growth. Raffles Medical has been taking in both COVID-19 and non-COVID-19 patients as public hospitals face mounting patient volumes. We also believe Raffles Hospital is experiencing higher patient loads due to:
    1. the return of foreign patients since Jun 22,
    2. an increase in elective surgeries as public hospitals have deferred non-emergency cases to tackle the ongoing bed crunch.
  • COVID-19 services to taper off. With most of Singapore’s population (80%) fully vaccinated (including the third booster shot), Raffles Medical has guided that COVID-19 services are expected to taper off in 4Q22. The emergence of new COVID-19 variants and the introduction of the new bivalent vaccine could help support vaccination revenue in the short term, but are unlikely to stem the overall decline, in our view.
  • Raffles Medical’s Community Care Facility at Connect@Changi is also expected to operate only till end-22, pending the absence of a further extension.

China: Delayed breakeven timeline.

  • Similar to 1H22, Raffles Medical’s Chinese operations continue to be impacted as several cities went through sporadic lockdowns in 3Q22. Hospital staff and patients were unable to commute to Raffles Medical’s Chinese hospitals, disrupting operations and depressing patient load.
  • With China’s government signalling intentions to maintain its zero-COVID strategy, we push back our previous EBITDA breakeven level timeline for Raffles Hospital Chongqing to 1H23 (end-2H22 previously) while pushing back our timeline for Raffles Hospital Shanghai to 2H25 (early-1H25 previously).

Competition to retain talent.

  • Raffles Medical faces stiff competition from the public healthcare sector to retain its employees. On top of a salary adjustment following a review in 2021, nurses in the public healthcare clusters are poised to receive 1.7-2.1 months’ bonus payment as part of a retention package announced by the Singapore government. To combat this, Raffles Medical has since adjusted employee salaries, dragging down overall margins.
  • However, we reckon that Raffles Medical’s efficient deployment of manpower and better cost control have mitigated the impact of rising manpower costs.

Raffles Medical – Earnings forecast revision & recommendation

  • We increase our 2022-24 revenue and earnings estimates, after factoring in lower opex and higher revenue growth assumptions. For 2022-24, we increase our revenue estimates by 4-6% while we increase our 2022-24 net profit forecasts to S$133.5m (S$108.7m previously), S$122.1m (S$87.2m previously) and S$113.3m (S$75.4m previously) respectively.
  • Maintain BUY recommendation on Raffles Medical with a higher PE-based target price of S$1.58 (S$1.42 previously), pegged at the same -1.0 standard deviation (24.2x 2023F PE) to Raffles Medical’s long-term average mean P/E.
  • Due to 9M22 net profit coming in higher than any of its previous yearly profits (and the subsequent record-high full-year earnings in 2022), we have taken a conservative approach and pegged our P/E multiple to -1.0 standard deviation instead of its mean to account for normalisation of earnings in 2023-24.
  • The ongoing recovery in domestic operations has helped to support Raffles Medical’s 2022-23 earnings and the tapering COVID-19 revenue. We still remain positive on Raffles Medical’s expansion in China in the medium term and expect an inflection point sometime in 2024-25 when Raffles Medical’s Chinese hospitals start to exit their gestation periods.
  • Catalyst to Raffles Medical's Share Price include:
    • Ramp-up of Chinese hospitals’ operations.
    • Relaxation in China’s zero-COVID policy.
    • Recovery in foreign patient load.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2022-11-01

Read also UOB's most recent report:
2023-01-16 Raffles Medical Group - China’s Reopening A Strong Start To The New Year.

Price targets by 5 other brokers at Raffles Medical Target Prices.
Listing of research reports at Raffles Medical Analyst Reports.

Relevant links:
Raffles Medical Share Price History,
Raffles Medical Announcements,
Raffles Medical Dividends & Corporate Actions,
Raffles Medical News Articles

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