Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


Raffles Medical - Sound Long Term Growth & Reasonable Valuation; Keep BUY

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  • We recognise that investors are concerned about Raffles Medical (SGX:BSL)’s flattish 2022 profit growth amidst lower contribution from COVID-19 related revenue in Singapore, rising inflation, and slower than earlier guided growth in its China business. However, we remain optimistic on Raffles Medical’s Singapore operations gradually reverting to normal, which will help offset some decline in COVID-19 related revenue and eventually drive growth in 2023 and beyond.
  • China, which accounts for ~7% of Raffles Medical’s revenue, should also see higher revenue beyond 2023. At current Raffles Medical's share price, the stock's valuation looks compelling.

Normalisation of Singapore Operations

  • We expect Raffles Medical’s Singapore hospital business to witness higher occupancy and billings, driven by the return of domestic patients undergoing elective treatments that were deferred during the COVID-19 pandemic as well as from the return of some foreign patients to Singapore. This, in addition to normalised business operations for Singapore healthcare clinics, would help Raffles Medical offset the drop in COVID-19 related revenues in the near term and support growth in 2023 and beyond.

China’s Zero COVID-19 Policy Has Hurt Private Healthcare Players

  • As per news report, the diversion of resources into China’s zero-COVID-19 approach has forced multiple private hospitals to suspend services they relied upon for revenue. We believe China’s zero COVID-19 policy impacted Raffles Medical’s China operations as well.
    • Raffles Medical’s Chongqing hospital was expected to see an EBITDA breakeven by end 2022, which we believe could now be delayed by a year.
    • Raffles Medical was supposed to see meaningful revenue contribution from its Shanghai hospital in 2022. However, we now believe this higher revenue contribution will now be delayed into 2023. We currently maintain that the Shanghai hospital will achieve an EBITDA breakeven by end-2024, as per the original estimate.
  • We believe Raffles Medical’s China hospitals have a strong long-term growth outlook as private hospitals accounted for only ~15% of total patient visits in 2020. This percentage, we believe, has the potential to grow further in coming years.
  • For Raffles Medical, China operations accounted for ~7% of its revenue in 2021.

Strong Balance Position and Compelling Relative Valuation

  • While Raffles Medical’s focus will be on ramping up China operations, once the country gradually relaxes its stringent COVID-19 related restrictions, the company’s S$91m net cash position should enable it to look at inorganic growth opportunities within the region.
  • Our target price for Raffles Medical, which includes a 2% ESG premium is based on a fair value of S$1.48.
  • Raffles Medical’s 2023F P/E and EV/EBITDA are below its peers’ average.
  • Reiterate BUY call on Raffles Medical with S$1.50 target price, 34% upside with ~2% yield.

Source: RHB Invest Research - 25 Jul 2022

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