CGS-CIMB's Tay Wee Kuang has reiterated his 'add' call on Raffles Medical Group BSL , on the belief that the medical group could maintain its operating margins, even after the pandemic, when it enjoyed a big lift in earnings from providing testing and vaccination services.
Tay's $1.75 target price, which has been similarly maintained, is based on 24 x FY2024 EV/EBITDA, 0.5 s.d. above its historical mean.
In his June 30 note, ahead of Raffles Medical's 1HFY2023 earnings report on July 31, Tay notes that the company recorded a peak operating margin of 44.2% in 2HFY2022 ended Dec 2022, thanks to revenue from the government for providing various pandemic-related services.
In contrast, in the pre-pandemic years of FY2015 and FY2019, operating margin was at an average 9.3%.
"While margins for the segment should taper with fewer Covid-19-related activities, we think the segment’s margins will normalise above pre-Covid levels," says Tay.
The analyst figures that one reason is from a higher proportion of recurring contracts from the government to run so-called transitional care facilities, which are being repurposed from community treatement facilities.
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Also, Tay expects higher patient volume through its network of general practitioner and specialist clinics.
"We think higher patient volume is sustainable, given Raffles Medical's efforts over the years to establish itself as an integrated healthcare player through its health insurance business and digital health platform," he says.
Elsewhere, the company's hospital business, which Tay estimates to be seeing a drag of some $30 million in China, has "huge scope" for recovery.
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Between FY2014 and FY2018, operating margins for the hospital segment declined from an average of 25.9%.
It dropped to 20.1% in FY19 after the opening of its hospital in Chongqing, and dipped even lower to 12.1% in FY2022 after the opening of its hospital in Shanghai in 2HFY2022, on relatively stable revenue.
Tay says that the recovery in profitability for the segment will be contingent on revenue momentum from Greater China, which has been sluggish from FY2017.
He believes his current estimates are lower than his peers as he has chosen to be more conservative in making assumptions on recurring contracts from the government.
However, "we see potential upside to our numbers assuming a mend in its profitability for its hospital services segment as well as the return of foreign patients to Singapore," says Tay.
Raffles Medical closed on June 30 at $1.36, up 0.74% for the day and down 2.16% year to date.
