SINGAPORE (April 25): RHB and Maybank Kim Eng Research have lowered their price targets on Raffles Medical Group (RMG) to $1.49 from $1.72, and to $1.67 from $1.70 respectively after the group posted a marginal 1.7% decline in 1Q17 revenue yesterday on softer-than-expected demand from foreign patients, hence missing the expectations of both research houses.
(See also: Raffles Medical 1Q earnings stay flat at $15.5 mil)
While RHB has downgraded its rating on the counter from “buy” to “neutral” as a result, Maybank reiterates its “buy” call for the long-term potential it sees in the group’s business expansion into China, which it estimates to turn profitable by its second full year of operation in 2020.
“On the bright side, both Shanghai and Chongqing Hospitals could lift growth in the mid- to long-term,” says Maybank analyst John Cheong in a Tuesday report.
Regardless, Cheong is cognisant that the slowdown in Singapore’s healthcare sector in addition to the start-up costs of both China hospitals are likely to drag on RMG’s earnings going forward. He estimates both hospitals to incur losses of $3.4 million in 2018 and $2.3 million in 2019, before reporting positive earnings of $2 million in 2020.
While RHB analyst Juliana Cai says she is also positive on the group’s medium-term outlook with regards to its China expansion, the research house’s FY17-19F earnings estimates have nonetheless been cut by 10-13% on the weaker healthcare outlook in Singapore.
RMG’s Chongqing hospital has not been factored into the numbers for RHB’s forecasts, given limited information provided by the group’s management, explains Cai.
“Based on the information available, our back-of-envelope DCF valuation suggests that the Chongqing hospital project could add an additional $1.10/share to our current TP on a bull case scenario. Even in a bear-case scenario, we believe this project to be accretive at $0.37/share,” she elaborates.
“Rental income from Raffles Holland Village would only contribute more significantly next quarter onwards… Management guided that the Raffles hospital extension would be completed by 4Q17. However, based on our channel checks, we think this is likely to be operational only next year. This may not be a bad thing, given the current weak demand from foreign patients,” adds Cai.
As at 9:56am, shares of RMG are trading flat at $1.42.
