SINGAPORE (Sept 21): UOB Kay Hian is upgrading its call on Raffles Medical Group (RMG) to “buy” from “hold” with a target price of $1.28.
To recap, since UOB Kay Hian downgraded the group to “hold” in April, its shares have declined about 22%.
In a Thursday report, analyst Andrew Chow says, “While earnings outlook for the next two years will likely be crimped by start-up losses in China, we believe growth over the next 10 years will be significantly enhanced where capacity will more than quadruple.”
Raffles Chongqing is scheduled to complete in 2H18 and the analyst expects the group to start recruiting doctors in early 2018 where about 12 specialists will be hired as medical leaders in the hospital and an expected 50% will be locally hired in China.
“We understand that the hospitals will be opened progressively in phases, where 150-180 beds (of the 700-bed capacity) will be initially opened and ramped up as demand picks up,” says Chow.
With the 700-bed capacity, the analysts expects the Raffles Chongqing to see long-term growth potential, underpinned by the One Belt One Road initiative and rising affluence in the region.
Since Raffles Chongqing and Shanghai will be opened in phases, the group will be able to better match revenue growth with costs to facilitate a faster breakeven rate.
Chow forecasts that startup losses start-up losses for Chongqing at $14 million in 2018 and $9 million for the smaller capacity Raffles Shanghai in 2019 when it opens in the second half is reasonable, due to the group’s phased bed opening and 20% to 30% cheaper operation cost in China.
This is in comparison to Gleneagles Hong Kong, which incurred startup losses of $66 million as at June 2017 over a year period.
However, medical tourism in Singapore continues to be soft, as RMG reported a slight decline in foreign patience for 2Q17.
Despite that, Chow believes that patient load growth will continue to be supported by local patients, especially given favourable demographic trends such as rising affluence and an ageing population.
The group has also shown efforts to hire more specialists to enhance centres of excellence, which the analyst believes will help attract medical tourists looking for more premium and quality services.
Currently, RMG is trading at 31 times 2018 forecast earnings, which is inexpensive compared to its peers trading at 36 times.
As at 11.30am, shares in RMG are trading at $1.10 or 2.7 times 2018 book with a dividend yield of 2.0%.
