944 Brokers' Digest

Analysts are maintaining a cautious stance on Raffles Medical Group (RMG) following the announcement of its 1H2020 results on July 27. In what RHB analyst Juliana Cai deems “results infected by Covid-19”, RMG 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, RMG was hit by a smaller patient load at its Raffles Hospital 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.

To CGS-CIMB Securities analyst Ngoh Yi Sin, these results — at 33% of her full year forecast — is “below expectations” because of higher operating costs partly incurred in dealing with Covid-19.

She adds that the closure of the group’s clinics in China had cost the group $14 million to $15 million, without which net profits would have come in at $31.2 million for 2QFY2020, in line with the $32.3 million logged in 1QFY2020.

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 2QFY2020 net profit to $9.7 million, ahead of the $7.5 million
recorded in 1QFY2020, says Ngoh.

Meanwhile, others such as analysts from OCBC’s Research team and RHB’s Cai see a bumpy recovery for RMG. 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% to 30% of the group’s hospital services revenue — Cai says a recovery is unlikely in the near future given the spread of the pandemic and the movement restrictions that are still in place.

RMG 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 a while before these patients return as it is unlikely that borders will reopen in the near term.

Time is also needed for RMG’s China operations to grow more profitable. “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”, adds Cai.

To this end, analysts from OCBC are maintaining their “hold” calls and target price of $0.96 for Raffles Medical. CGS-CIMB’s Ngoh, similar to OCBC, has a $0.96 target price, but has downgraded her stance to “hold” from “add” previously. Her previous target price was $0.976.

“We cut our FY2020-2022F EPS by 6.6%-13.4% to reflect the ongoing headwinds facing medical tourism and delay in the Shanghai hospital’s opening (most likely FY2021F). We think the improving local patient volume has been priced in, but with limited visibility on the return of foreign patients,” she notes.

Maybank Kim Eng analyst Lai Gene Lee has also downgraded his call to a “neutral” at a target price of $0.99. “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 is in line with RHB’s Cai who has cut her FY2020-2022F earnings by 13%, 13% and 6% respectively. She also has a “neutral” stance on the counter at a new target price of $0.91. – Amala Balakrishner

Keppel Pacific Oak US REIT
Price target:
RHB "buy" US$0.80

‘Marching on’ despite Covid-19

RHB has maintained its “buy” call for Keppel Pacific Oak US REIT (KORE) with a target price of 80 US cents ($1.10) on its “strong” set of 1H2020 results, and distribution per
unit (DPU) coming ahead of the brokerage’s expectations.

On July 22, KORE reported 2QFY2020 DPU of US$1.56 ($2.15), some 4.0% higher than its DPU of US$1.50 in 2QFY2019. Its 1H2020 DPU rose 3.3% y-o-y, which is aided by positive double-digit rental reversions from previous quarters, rental escalations, and contributions from One Twenty Five in Dallas.

Management has also reported that rental collections were at a healthy 94% for 1H2020, which allows KORE to maintain their 100% payout ratio.

In 2Q, KORE signed around 92,000 leases despite the Covid-19 pandemic, resulting in occupancy improving 94.3% from 93.6% as of December 2019. KORE has also reported that despite a surge of a second wave of Covid-19 cases in its markets like Texas and Florida, it has not seen any spike in rent relief requests so far.

Still, KORE has received rent relief requests from around 15% of its tenants by Cash Rental Income (CRI) and only 5.7% of them have been granted rent deferrals resulting in around a 2.8% economic impact.

Also, KORE has recently refinanced US$15 million of IPO loans maturing in November 2021 at a much lower interest rate, resulting in a 15bps reduction in overall interest costs to 3.19% pa. Therefore, currently they have no long-term refinancing requirements, and all of its loans have a healthy cover of 4.4 times.

While a second wave of the Covid-19 pandemic can easily put the US economy, along with KORE at risk, RHB analyst Vijay Natarajan has therefore made no changes to KORE’s earnings estimates. – Kayla Whang

OUE C-REIT
Price target:
CGS-CIMB “hold” $0.482

Hospitality sector outlook remains challenging

CGS-CIMB Research is keeping its “hold” recommendation on OUE Commercial REIT (OUE C-REIT) with an unchanged target price of $0.482, as there is limited scope for outperformance in the near term with the continued challenging hospitality earnings outlook.

This came following the REIT posting a 40.5% y-o-y drop in its 1H2020 distribution per unit (DPU) to just $0.01 from $1.68 in 1H2019. But distributable income was 12.2% higher y-o-y at
$54.5 million.

The manager of the REIT said that the drop in DPU was despite the higher amount distributable to unitholders is $13.8 million of distribution comprising tax-exempt income and capital distribution was retained to preserve financial flexibility in view of uncertainties posed by the Covid-19 situation.

Typically, OUE C-REIT’s distribution policy is to distribute at least 90% of its taxable income on a semi-annual basis, with the actual level of distribution to be determined at the manager’s discretion. Revenue for the period was 32.4% higher at $142 million from $107.2 million a year ago.

During the quarter, OUE C-REIT’s hospitality segment contributed $16.9 million in revenue and $15.4 million in NPI in 2QFY2020. This mainly came from the fixed rent component of its master lease.

However, portfolio revenue per average room (RevPAR) declined 71.7% y-o-y to $55 as at 2Q20, dragged largely by a 79.5% contraction in Mandarin Orchard Singapore (MOS) RevPAR, while Crowne Plaza Changi Airport saw a 56.2% contraction in RevPAR.

In a July 24 report, analysts Lock Mun Yee and Eing Kar Mei said: “Operating conditions remain challenging with the loss of tourist arrivals and slower corporate demand hence, we anticipate the hospitality contributions to track close to its fixed rent component for FY2020.”

Meanwhile, following OUE C-REIT’s merger with OUE Hospitality Trust (OUE HT), overall gear- ing has increased to 40.1% as at end 2QFY2020 with average interest cost at a slightly lower 3.1%. It has a remaining $575 million of debt to be refinanced in 2020, but management indicated that these will be refinanced ahead of maturity, with average debt cost remaining stable.— Samantha Chiew