• Keep NEUTRAL and SGD1.06 TP, 4% upside and c.2% yield. While 2024 earnings growth will be driven by improvements in Raffles Medical’s Singapore operations and lower losses from its China unit, longer-term earnings will be driven by its China operations, which are a few years away from breaking even in EBITDA terms. We also await the completion of its Vietnam acquisition (subject to regulatory approval). We see risks of higher operating costs amidst a tight labour market for skilled healthcare workers, a still-low foreign patient load, and losses from the health insurance unit.

• Acknowledgement of increased regional competition. At its latest AGM, RFMD acknowledged, in response to shareholders’ questions, that the appreciation of the SGD vs regional currencies has impacted Singapore's position as a medical hub, as it enabled certain healthcare service providers in neighbouring countries to take advantage of this situation. While RFMD and other private healthcare players in Singapore need to distinguish themselves by offering superior quality care, as well as enhanced treatment and services to regain its position as a preferred medical tourism destination, we believe the lost foreign patient load could remain weak in the near term.

• Chairman has been increasing his stake in RFMD. Since late February, Dr Loo Choon Yong, RFMD’s executive chairman, has been gradually increasing his total stake in the group. His holdings have increased to 54.34% as at end- May from 53.02% early this year. YTD, he has 23.25m shares, at an average price of SGD1.03/share.

• Fresh ESG data; unchanged valuation basis. RFMD reported Scope 1 and 2 emissions data for the first time in 2023, making it the baseline year. It is working towards tracking Scope 3 emissions data. It aims to reduce the levels of Scope 1 and Scope 2 emissions by 5% in the medium term (by 2031 and 2040) and by 10% in the long term (beyond 2040). It is also aiming for a 5% reduction in energy consumption intensity, a 5% reduction in water consumption intensity, and a 5% reduction in waste generation intensity by 2035. We keep RFMD’s ESG score at 3.1 for now, even though we noticed a deterioration in electricity consumption intensity and water consumption intensity in 2023 over 2022, as we await to see its progress towards achieving its recently announced ESG goals. As its ESG score is in line with the country's median ESG score, we ascribe a 0% premium or discount to its assessed fair value as at end May. We continue to value the group based on an average value derived from the use of P/E, P/BV, EV/EBITDA, and DCF valuation methods.

Source: RHB Research - 5 Jun 2024