• NEUTRAL, TP drops to SGD1 from SGD1.06, 1% downside with c.2% yield. Raffles Medical’s 1H24 recurring profit came in below our and consensus estimates, due to higher costs. While longer-term growth remains driven by overseas operations (China and, likely, Vietnam), we see limited rerating catalysts in the near term. Instead, we note potential earning headwinds from higher operating costs, lower numbers of foreign patients, and sustained losses in its insurance business. We cut FY24–26F earnings by 11-13% and roll forward our valuation basis to blended FY24-25F estimates.

• 1H24 disappointed. RFMD’s 1H24 revenue of SGD365.7m (+9% HoH, -1% YoY) accounts for 48% of our full-year projection. With the exception of healthcare services, all businesses reported YoY revenue growth. 1H24 recurring PATMI came in at SGD29.1m (+27% HoH, -44% YoY), at only 35% of our full-year forecast. The earnings disappointment stemmed largely from lower other operating income and higher finance expenses.

• Healthcare services business outlook. 1H24 revenue came in at SGD134.5m (+23% HoH, -17% YoY), accounting for 49% of our 2024F. Profit before tax (PBT) amounted to SGD27.6m (+274% HoH, -54% YoY). The YoY decline in revenue was due to a lack of COVID-19-related business. RFMD will continue to operate the transitional care facility (TCF) at Changi Expo until Feb 2025. However, the contract to operate 176 beds dedicated to the TCF programme at its hospital will last for five years. The TCF contract margins are expected to be lower, and RFMD believes the contribution from this TCF business could be volatile, depending on the timing and bed utilisation.

• Hospital services upside depends on China and Vietnam. RFMD is still seeing below-pre-pandemic foreign patient loads in Singapore. In addition, management noted that 1H tends to be seasonally weaker due to Lunar New Year celebrations in Singapore and China, which leads to a lower number of elective surgeries done. We see a ramp up in segment revenue driven by Chinese hospital operations, which are expected to see EBITDA break even earliest by the end of 2025. Although the acquisition of a majority stake in the Vietnam hospital is still pending regulatory approval, RFMD began managing the hospital operations in Jan 2024. Management noted that the contribution from hospital management fees is negligible.

• Insurance losses to continue. RFMD expects a strong ramp-up in its insurance business in the coming year. Management guided that if the current business situation prevails, the insurance business could report losses for 2-3 years.

• ESG. Our TP has a 0% ESG premium/discount to the fair value, as RFMD’s ESG score is in line with our median ESG score for Singapore.

Source: RHB Research - 30 Jul 2024