UOB Kay Hian is keeping its “buy” call on Raffles Medical Group BSL after the group announced that it was acquiring a majority stake in the American International Hospital in Ho Chih Minh, Vietnam. The hospital was founded in 2018 and has 120 beds. It has some 500 staff, of which 60 are doctors.
“This is in line with our expectations that Raffles Medical would expand regionally given its growing cash war chest and limited domestic growth potential. It was noted that the valuation of the hospital was at US$45.6 million ($62.4 million) and would be funded internally by cash,” say analysts Llelleythan Tan and Heidi Mo.
“Raffles Medical had about $300 million in cash as at end-1HFY2023. It would also enter into a management services agreement to manage [the hospital’s] operations,” they add.
The acquisition was seen to benefit the group slightly with the hospital’s ebitda at $5 million to $6 million based on its valuation and ev/ebitda multiple assumption of around 13x
“Furthermore, the management services agreement to manage American International Hospital’s operations would bring in higher revenue and higher quality earnings for Raffles Medical. Assuming a 70% stake and annual ebitda of $3 million - $5 million from the service agreement, we estimate this would boost Raffles Medical’s FY2024 net profit estimate by at most 4% - 5%. Additional potential upside may come from the service agreement,” note the analysts.
The extension of Raffles Medical’s Changi Transitional Care Facility (TCF) is also a plus in the analysts’ books.
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“This TCF is now set to operate till Feb 25, 2024, in line with our earlier expectations that the Changi TCF would be extended,” they write.
However, the revenue estimates from the TCF implies an annual figure of $30 million to $35 million. The sum, which is based on a stable occupancy of 90% as well as the number of beds and the unit price of $468 beds a day, is still “starkly lower” than Tan and Mo’s previous TCF revenue estimates of $110 million to $120 million despite the contract extension being generally positive for the group.
To this end, the analysts see downside risks to their FY2023 to FY2025 revenue and earnings estimates. This is due to higher-than-expected Covid-19 revenue, lower TCF contributions and increased contributions from the lower-margin core clinic segment.
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A persistently strong Singapore dollar (SGD) against regional currencies is also expected to drag the recovery of Raffles Medical’s hospital services segment in 2HFY2023.
“We now expect 2HFY2023 patmi to fall 45.2% y-o-y and 23.2% h-o-h respectively (-41.5% y-o-y and -18.0% h-o-h previously) to $46 million,” say Tan and Mo.
“Potential upside may come from the three upcoming TCF tenders. Based on an average 133 beds per TCF and similar terms to the current TCF, we estimate that winning one TCF tender would lift our FY2024 patmi forecast by 3% - 4%,” they add.
In the same report, the analysts have switched up their revenue assumptions.
“From Raffles Medical’s 1HFY2023 results, we initially estimated that Raffles Medical had around $85 million of Covid-19-related revenue in 1HFY2023, of which $55 million was from the TCF given the absence of vaccination and PCR test revenue,” they write.
“Based on the new information, excluding an estimated semi-annual TCF revenue of around $15 million, we estimate that there was about $50 million of Covid-19-related (excluding TCF) revenue in 1HFY2023, $20 million more than our initially expected $30 million. However, we expect this source of revenue to taper off completely in 2HFY2023,” they add. “We also reckon that 1HFY2023 core clinic revenue is likely better than previously estimated. From the 1HFY2023 results, we had already pencilled in close to 15% y-o-y growth from pre-Covid-19 levels (FY2019) at $82 million. However, we now estimate that 1HFY2023 core clinic revenue is 35% - 40% higher than FY2019 levels at around $95 million - $100 million, driven by higher patient footfall at Raffles Medical’s clinics.”
As at 12.52pm, shares in Raffles Medical are trading 1 cent lower or 0.86% down at $1.16.
