• Better volume growth from local patients
• Higher intensity cases from foreign patients albeit lower volume
• 4Q is usually the strongest quarter

Higher costs continue to be incurred amid expansion

Raffles Medical Group’s 3Q15 revenue rose 7.4% YoY to S$101.5m, meeting 24.3% of our full-year forecast. But PATMI was marginally higher by 1.2% at S$15.6m, which came in a tad below expectations as it formed 21.6% of our FY15F projection. Revenue from Hospital Services and Healthcare Services divisions had increased by 11.7% and 3.5% respectively. Local patients’ volume growth continued to support this performance.

While volume from foreign patients was down, they are seeing greater intensity cases from them such as bone marrow transplant programmes. Higher staff costs (3Q: +6.6%), depreciation costs (3Q: +28.5%) and operating lease expenses (3Q: +32.3%) continue to be incurred, given the expansion plans including the opening of new clinics. Nonetheless, we note that EBITDA margin maintained at ~21%, and management will focus on striving to achieve better efficiency.

Diversification important as Indo patients decline

The lower volume of foreign patients (from Indonesia, Russia) was impacted by several external factors such as the weaker macro environment in their home countries and weakening home currency against SGD, leading some patients to look for cheaper alternatives in other markets such as Malaysia. To this situation, the group’s diversification initiative to tap on more countries including Vietnam becomes increasingly important in offering some stability in the revenue performance.

Recall that the group had recently concluded the acquisition of International SOS (MC Holdings) Pte Ltd for 10 clinics in China, Vietnam and Cambodia through a JV. We understand that this business is profitable and these clinics will eventually be branded under Raffles Medical Group, as well as support the group’s network in Singapore, Hong Kong and China.

Estimates reduced

With the above set of results, we have reduced our PATMI estimates for FY15 and FY16 by 9%/6%, while keeping in mind that 4Q is usually their strongest performing quarter. Our fair value estimate is kept at S$4.59 as we roll forward to 33.5x FY16F P/E. Maintain HOLD. We still advocate longer-term buyers to add position at S$4.36 or lower.

Source: OCBC Research - 27 Oct 2015