- Reiterate BUY and SGD1.75 TP, 33% upside and c.3% yield. Raffles Medical’s share price has corrected by 10% in the last one month. With no change in its fundamental outlook and our investment thesis, we see this as an opportunity to accumulate the stock. The extension to the transitional care facility (TCF) arrangement and possibility of operating additional TCFs in Singapore should be positive in the near term. We believe China’s reopening and its one-child policy relaxation will drive longer term revenue growth given RFMD’s recent expansion into China.
- Return of tourists and continuation of the TCF. While Singapore has seen a return of medical tourists, we believe there could be further upside to the numbers amidst the expected return of Chinese tourists in 2H23. We maintain that RFMD’s competitive pricing vs other private healthcare players in Singapore will translate into higher foreign patient load over the next 12 months. We continue to believe that the company could continue operating its TCF beyond Jun 2023, a facility that has boosted its earnings in the post-COVID period. We also think RFMD could have opportunities to participate in operating new TCFs that will be offered under the tendering process, which may further support near-term earnings growth.
- China – a long term opportunity. RFMD had expanded its presence in China just before the pandemic with the setting up of the Shanghai hospital. With the relaxation of China’s zero-COVID policy, we see an opportunity for revenue from China to grow rapidly in the coming years. The company operates hospitals in Shanghai, Chongqing and Beijing, while recently opening a centre for assisted reproductive therapy and in- vitro fertilisation in Hainan. This facility could benefit from China’s recently relaxation of its one-child policy at a time when the country is already witnessing a rapidly ageing population.
- M&A potential still exists. RFMD is in a SGD180m net cash position, and we expect it to generate >SGD100m of free cash flow in each of the forecasted years. It already has established a SGD1bn multicurrency medium-term note programme with DBS (DBS SP, NEUTRAL, TP: SGD35.70). This, we believe, could enable it to explore inorganic growth opportunities in China and the Indochina region.
- A slight ESG premium to its fair value. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Since Raffles Medical’s ESG score is one notch above the country median, we apply a 2% ESG premium to its fair value of SGD1.70 to derive our TP.
Source: RHB Research - 8 Jun 2023