• BUY with SGD1.75 TP, 25% upside and c.3% FY23F yield. Raffles Medical’s 1H23 profit was in line with our estimates. Operationally, the business is gradually returning to its pre-COVID-19 state and margins are normalising. The Changi Expo transitional care facility (TCF) contract has been extended for a few months as the re-tendering process is still ongoing. We maintain that continuing to operate the current TCF and likely winning new TCF operations will be positive in the near term and the gradual ramp- up of the China business should drive longer-term revenue growth. Its valuation remains compelling compared to that of regional peers.

• 1H23 results were in line with expectations. 1H23 profit of SGD60m (+1% YoY) accounted for 49% of our estimate. Revenue fell 9% YoY to SGD371m as the healthcare business saw a decline in revenue, consistent with the reduction in COVID-19 related activities. Due to the adoption of SFRS (I) 17, the insurance business is now reported as a separate segment, which gives greater clarity and visibility to the healthcare business earnings and margins, from which it has been carved out. Hospital revenue of SGD140m (+8% YoY) was supported by the return of some foreign patients and a gradual return of business activities in its China hospitals. Revenue from China grew 16% YoY to SGD29m.

• Takeaways from analyst briefing. While local patient load in Singapore has normalised, foreign patient load has only returned to 70-80% of the pre- COVID-19 level. The low level of foreign patient load is due to a lower number of patients from China and a stronger SGD, which could be dissuading the return of some cost-sensitive patients. The decline in workforce costs due to the reduction of COVID-19 related activities is now well accounted for, implying that margins are normalising. RFMD’s contract to operate the Expo TCF has been extended for a few months as the tendering process is still ongoing. It will not only participate in the retendering process for the current TCF but will also bid for any other TCF facilities that gets offered by the Government for management. The reopening of China initially brought a high patient load to hospitals, but operations have normalised. RFMD maintains that its Chinese hospitals are on track to break even within 2–3 years from the first year of operations.

• Inorganic growth opportunities and compelling valuation. We keep our earnings estimates unchanged. In addition to a SGD208m net cash position, RFMD has a SGD1.0bn multi-currency medium-term notes programme, which will enable it to undertake earnings-accretive acquisitions if an opportunity presents itself in Indonesia, Vietnam, China, or Thailand. Our TP, which includes a 2% ESG premium, implies a 26x 2024F P/E, which is still below its regional peer average (Figure 2).

Source: RHB Research - 1 Aug 2023