CGS-CIMB Research analyst Tay Wee Kuang has upgraded his recommendation on Raffles Medical Group to “add” from “hold” previously.
Tay has, however, lowered his target price estimate to $1.27 from $1.33 previously. The new target price is pegged to an FY2023 EV/EBITDA of 16x, 0.5 standard deviation below its five-year historical mean.
Tay says the move now reflects the “valuation overhang from an extended gestation period of its new China hospitals”.
The revised valuation, which is now deemed more “palatable” due to a change in Tay’s valuation methodology, has led to the upgrade in the recommendation, he says.
“The change in valuation method from sum-of-the-parts (SOTP) previously is due to a lack of information regarding Raffles Medical’s China operations,” he adds.
Further to his report, Tay is negative on the group for the time being.
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As at July 9, the analyst notes that the group’s share price has fallen some 18% year-to-date (ytd) as he believes investors are “wary” of the earnings gap left behind by Covid-19-related services in the FY2021 ended December.
During the year, the group saw its Covid-19-related services contributing at least 20% to its revenues.
“With Singapore’s move towards endemicity, we expect revenue from Covid-19-related services to decline by [around] 60% in our FY2022-FY2024 forecasts,” Tay writes.
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“Even though the latest wave of infections suggests that the Singapore government could once again step up collaboration efforts with private healthcare providers like Raffles Medical Group, we believe the intensity of such efforts will be much lower, given the smaller scale of operations for Covid-19 testing, vaccinations, as well as management of community facilities,” he continues.
That said, the return of the group’s business as usual (BAU) cases will offset the earnings gap, with Tay estimating a decline of 10% in Raffles Medical’s core net profit in the 1HFY2022.
“According to data from the Ministry of Health (MOH), ytd acute private hospital admissions/specialist outpatient visits have returned to 84%/97% of pre-Covid levels as of May, after declining to 80%/67% in FY2020 at the start of the pandemic,” Tay notes.
“We believe the recovery has been primarily driven by the return of domestic patients undergoing elective treatments that had been deferred over the last two years, and the partial return of foreign patients as medical tourism ramps up as Singapore reopened its borders more extensively in April,” he adds.
In China, Tay expects operations at the group’s new hospitals in Chongqing and Shanghai to delay their EBITDA breakeven by a year due to the sporadic lockdowns in various parts of the country during the 1HFY2022.
The analyst sees the group breaking even for its China hospitals only in FY2024.
Even though the Covid-zero stance in China has prolonged gestation woes, Tay notes that the group’s start-up costs are managed by opening bed capacities in phases.
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“Raffles Medical had also shared that it was able to contain costs within its guided range of EBITDA losses through cost control measures,” he adds.
In the analyst’s view, re-rating catalysts to the group’s share price include a quicker turnaround of its new China hospitals, and a swifter return of foreign patients.
On the other hand, downside risks include prolonged losses in China and potential earnings downgrades by the market given the earnings slowdown in FY2022 as the group weans off its Covid-19 contributions.
As at 10.01am, units in Raffles Medical are trading flat at $1.11.
