SINGAPORE (Oct 31): Analysts are adjusting their forecasts and recommendations on Raffles Medical Group (RMG) after the management unveiled more information regarding its upcoming hospitals in China.
According to RMG, construction on Raffles Hospital Chongqing and Raffles Hospital Shanghai are on track, with the hospitals targeted to be operational by 2H18 and 2H19, respectively.
RMG expects each hospital to achieve EBITDA breakeven in the third year after their respective openings. Each hospital is expected to incur an EBITDA loss of $8-10 million in the first year, followed by an EBITDA loss of $4-5 million in the second year.
“While we believe in the long-term growth potential of Raffles Medical’s expansion plans into China, we believe earnings could decline during its gestation period, accentuated by less robust macroeconomic growth and outlook on existing operations,” says DBS Group Research’s lead analyst Rachel Tan in a report on Tuesday.
DBS is downgrading RMG to “fully valued” from “hold” previously, and lowering its target price to $1.00 from $1.20 previously.
Tan opines that RMG is likely to suffer some “near term pain for long term gain.” However, she believes its current valuation has already priced in the longer-term growth prospects.
Over at Phillip Securities Research, investment analyst Soh Lin Sin is relatively more upbeat about RMG’s upcoming hospitals in China.
“We are upbeat on the potential growth that these new hospitals in China would bring to the group: diversification with a higher contribution for overseas operation; and tapping into China’s growth,” Soh says.
Phillip is upgrading RMG to “accumulate”, and raising its target price to $1.32, from $1.27 previously.
“Better than expected performance in China hospitals would be a re-rating catalyst,” Soh adds.
On the flipside, CIMB Research’s lead analyst Ngoh Yi Sin cautions that a “key downside risk” would be poor execution of RMG’s overseas hospital expansion.
Ngoh is keeping CIMB’s “add” rating on RMG, which she describes as a “longer-term healthcare play with exposure to the growing China market.”
In addition, she forecasts an EBITDA loss of $6-13 million per annum over FY18-20F for RMG’s Chongqing hospital, which is slightly above the management’s guidance.
However, Ngoh opines that start-up costs for the new hospital will be lower than expected.
“Start-up costs for Chongqing hospital will not be alarming,” she says. “Our FY19F EPS is now 2.3% higher to reflect lower gestation costs for Chongqing hospital.”
As a result, CIMB’s target price for RMG is raised to $1.24, from $1.21 previously.
Meanwhile, RHB Research analyst Juliana Cai believes the new Chinese hospitals are key for the group, after RMG on Monday turned in another “uninspiring set of results” in 3Q17.
RMG posted a 1.0% increase in earnings to $16.4 million for the 3Q ended September, as revenue edged up marginally to $119.6 million.
See: Raffles Medical Group posts 1% increase in 3Q earnings to $16.4 mil
“Given the lacklustre growth in hospital services revenue over the past nine months, we are not particularly excited with the Raffles Medical Hospital extension coming on stream in December this year,” Cai says. “The Singapore healthcare market is rather matured. As such, the timeline to the turnaround of the new Chinese hospitals is the key swing factor to its future earnings.”
RHB is upgrading its rating for RMG to “neutral”, from “sell” previously, with an unchanged target price of $1.10.
“We think earnings would be rather unexciting over the next 2-3 years due to the high start-up costs and ramp-up phase for the new Chinese hospitals,” Cai says.
As at 1.43pm, shares of Raffles Medical are trading 1.5 cent higher at $1.14. According to RHB, this implies an estimated recurring price-to-earnings ratio of 27.9 times and a dividend yield of 1.7% for FY17.
