• Keep BUY, with new SGD1.65 TP from SGD1.60, 24% upside and c.2% FY23F yield. We increase 2022F earnings by 33%, 2023F-2024F earnings by 9-12%, and roll forward our valuation to 2023F. Raffles Medical’s 9M22 profit accounted for more than our earlier 2022F. While the decline in COVID-19-related revenue was in line with expectations, the drop in related costs was faster and higher than expected, implying better- than-expected margin. We are still positive on its long-term growth, which remains dependent on the ramp up of its China operations.

• 9M22 business update. The higher foreign patient load from the reopening of Singapore’s borders and the return of Singapore residents who postponed their elective surgeries have helped boost RFMD’s hospital business. The healthcare business has already witnessed patient load that is higher than in 2019 (pre-pandemic period). While COVID-19- related revenue was down YoY, the group saw better-than-expected margin amidst better cost control and deployment of manpower, together with lower inventories and consumables used as well as a reduction in purchased and contracted services. In 3Q22, revenue grew 6.5% YoY to SGD199.5m, while profit increased 62.1% YoY to SGD23.6m. For 9M22, revenue increased 9.6% YoY to SGD581.8m and profit increased 57.3% YoY to SGD98.2m.

• Short-term headwinds expected. We expect COVID-19-related revenue and its associated costs to decline to negligible levels in 2023. Also, in line with management, we believe that the supply chain and labour constraints may lead to higher operating costs and negatively impact RFMD’s current elevated margin. Moreover, we expect its China business, especially operations at its Shanghai hospital, to see a gradual ramp-up in operations in 2023. Management maintained that the EBITDA breakeven period for its China operations remains unchanged at 2-3 years, implying that the Shanghai hospital could make EBITDA losses during 2023–2025.

• Adjusting earnings and moving our valuation basis forward. On the back of a better-than-expected 9M22 profit, we have adjusted 2022 earnings by 33%. We believe the moderation in margin could be more gradual in 2023, and hence, adjust our 2023F-2024F earnings higher by 9–12%. We also roll forward our valuation basis from blended forward to 2023F earnings. Our TP includes a 2% ESG premium over a fair value estimate of SGD1.60.

Source: RHB Research - 2 Nov 2022