• Keep BUY and SGD1.65 TP, 25% upside and c.2% yield. Near-term cost headwinds and rapidly diminishing contribution from COVID-19- related revenues could keep Raffles Medical’s Singapore growth in check, despite the ongoing reopening of regional economies allowing more inflow of medical tourists into the country. We expect its China business to drive long-term growth, and believe an earlier as well as rapid reopening of China’s borders could provide upside risks to our 2023 estimates. Its valuation is also compelling, as the stock trades below peer average.

• Near-term cost headwinds expected. Historically, RFMD’s 2H revenue and profit tend to be higher than that of 1H. While we believe 2H22 revenue will be higher than that of 1H22, profits may come in lower amidst higher staff costs and increased operating expenses related to the higher patient load in Singapore. According to the Philips Future Health Index 2022 report, as staff shortages continue, almost one-third (32%) of healthcare leaders in Singapore are placing employee retention at the top of their priority lists. In 2022, 15% of Singaporean healthcare leaders considered staff retention a top priority vs 9% in 2021. Given Raffles Medical’s group practice model, where doctors and nurses are employees of the organisation, we believe the wage pressure could be material.

• China hospitals to see resumption in growth; upside risk of China reopening early and swiftly. Raffles Medical’s China business has seen a steady increase in the number of patient visits. We maintain that its Shanghai hospital should see a gradual ramp-up in operations in 2H22. We believe an earlier-than-expected and swift reopening of the China borders would add upside risk to its China revenues in 2023 and beyond. Nevertheless, for now, in line with management guidance, we maintain that the hospitals in Chongqing and Shanghai could report EBITDA losses of SGD3-4m and c.SGD10m respectively in 2022.

• Strong net cash balance sheet; more funding coming its way. Raffles Medical has a SGD135m net cash position. The company also recently announced the establishment of a SGD1bn multi-currency medium-term notes programme, funding from which we believe could enable Raffles Medical to explore acquisition opportunities in the region.

• Commands an ESG premium; our TP implies a P/E in line with peers. Based on our in-house rating methodology, we ascribe Raffles Medical an ESG rating of 3.1 (out of 4.0). As this is higher than our median ESG rating of 3.0 for stocks under coverage in Singapore, we ascribe a 2.2% ESG premium to our fair value to arrive at the TP. Our DCF-based TP implies 33x 2023F P/E – largely in line with its regional peer average.

Source: RHB Research - 28 Sep 2022