RHB Group Research analyst Shekhar Jaiswal is maintaining his “buy” call on Raffles Medical Group (RMG) BSL at a target price of $1.70, following strong healthcare revenue in 2HFY2022 ended Dec 31, 2022, and the expected reopening of China.
In his note on March 24, Jaiswal noted that RMG’s transitional care facility (TCF) is subject to review by mid-year, but will likely continue to operate beyond June, translating to better-than-expected margins in 2023.
TCFs are short-term care facilities set up during the pandemic for Covid-19 patients that helps to free up beds in hospitals. The facilities are for medically stable patients from public hospitals waiting for long-term care arrangements. Raffles currently operates one at the Changi Expo.
“We remain positive on RMG’s long-term growth, which is dependent on its China operations generating profit,” he says. “Its forward P/E remains compelling versus regional peers.”
He notes that the group’s target price includes a 2% ESG premium, and implies a 26 times FY2023 P/E, which is lower than the regional peer average.
As Singapore’s public hospitals continue to run at almost full capacity, Jaiswal notes that TCFs will be retained as a key part of the healthcare system.
“Public hospital bed occupancy has risen from a pre-Covid-19 level of 87.6% in 2019 to 93.1% in 2022,” he says. “This is largely due to the higher number of older patients with complex conditions who require longer hospital stays.”
Jaiswal quotes Singapore’s Health Minister Ong Ye Kung, who said that the TCFs set up during the pandemic to prevent hospitals from being overwhelmed have proven so valuable that they will be retained as a key part of Singapore’s healthcare system.
On that account, he believes the group could continue operating its TCF beyond June.
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Jaiswal also attributed his unchanged long-term investment thesis to higher than pre-Covid-19 patient load, a rise in elective surgeries and gradual return of foreign patient load, which should support near-term earnings.
He expects RMG’s China hospital business to resume operations gradually this year, and noted that despite being in its second year of operation, the ebitda losses were comparable to what it anticipated in its first year.
“RMG still expects its Shanghai hospital to break even (in terms of ebitda) in two to three years,” he says. “It has an $1 billion multi-currency medium-term note programme in addition to a $180 million net cash position, which will allow it to undertake an acquisition if a compelling opportunity arises.”
Separately, DBS Group Research acknowledges that the TCF development is positive for RMG as it will be a new source of income.
However, DBS, in its March 24 report, is keeping its "hold" call and $1.48 target price on the stock, as it maintains its view that RMG's earnings growth will slow this current FY2023 from the "very high base" of the preceding FY2022.
DBS says key re-rating catalysts would include stronger visibility in the earnings trajectory from the TCF business; a longer contract with the government locked in, and last but not least, more partnerships with the government.
At as 1.51pm, shares at RMG are trading 1 cent lower or 0.70% down at $1.41.
