• Raffles Medical Group posted 2018 net profit of S$71.1m (+0.8% y-o-y), while adjusted net profit came in at S$68.5m, slightly above expectations. The group saw marginal gains in the form of improving minority interests as well as a higher final dividend of 2.0 S cents.
• China operation continues to build up with the Chongqing hospital opening in Jan 19, and the Shanghai hospital set for completion in 4Q19.
• Maintain BUY and DCF-based target price of S$1.30.

2018 Results

Results slightly above expectations.

• RAFFLES MEDICAL GROUP LTD (SGX:BSL) announced 2018 net profit of S$71.1m, up 0.4% y-o-y. Excluding other operating income such as fair value gains on investment properties, adjusted net profit was S$68.5m, or 106% of our forecast.
• For 4Q18, net profit was S$21.9m, down 0.6% y-o-y. 4Q18 results were slightly above expectations.
• Raffles Medical Group declared a final dividend of 2.0 cents (2017: 1.75 cents).

2018 revenue marginally increased yoy, other operating income up.

• Turnover increased 2.4% y-o-y to S$489.1m in 2018. Healthcare services revenue rose 6.0% y-o-y while hospital services revenue dipped 0.8% y-o-y, partly due to the refurbishment of inpatient facilities.
• Other operating income jumped 34.0% y-o-y to S$5.1m, partly due to fair value gains of investment properties as well as forex gains.

Staff cost in check, decreasing 0.6% yoy in 2018.

• Purchased and contracted services increased 7.0% y-o-y to S$42.3m while other operating expenses increased 2.6% y-o-y to S$32.7m. Overall operating margin was up to 17.2% (2017: 16.8%).

Improvement in minority interest.

• Raffles Medical Group's minorities loss narrowed to S$0.2m in 2018 from S$2.2m in 2017. Management noted that the segment, which includes MC Holdings, has seen doctors' cost fall to the group's level ratio of about 50% vs 60-70% in recent years.

Essentials

China: Hospital update.

• Raffles Hospital Chongqing opened on 2 Jan 19. While contribution from the hospital has not kicked in, the group will open up more inpatient beds and other facilities in response to demand from patients and corporate clients.
• Staff currently numbers 200 in Chongqing with 50 doctors. Hiring has been progressively made from the previous quarter's staff count of 100, and costs can be expected to kick in for subsequent quarters.
• Management has reiterated its guidance of S$8m-10m EBIT loss in the first year of operations.
• Construction of Raffles Hospital Shanghai in Pudong is progressing well and is expected to be completed in 4Q19.

Entry to telehealth, improving efficiency.

• Raffles Medical Group recently launched the Raffles Connect platform, allowing patients to access healthcare services for treatment and healthcare needs. In addition, patients can consult a doctor via a 24/7 tele-consultation service.
• Telehealth is still in its infancy stage in Singapore, with platforms largely piloted by start-ups. Competitors have also similarly launched their products in recent months.

Merdeka Generation Package a positive; adapting to dependency ratio.

• The recently announced Mederka Generation Package brings about an increased population of some 500,000 available for subsidised CHAS services. Management also commented on the reasonably longer timeframe for adjustment in the lowering of the dependency ratio of services in the recently announced budget.
• We have also noted marginal impact of the changes on Raffles Medical Group’s dependency ratio In our report dated on 20 Feb 19. See Consumer & Healthcare - UOB Kay Hian Research 2019-02-20: Marginal Drag From Tightening Of Foreign Manpower Policy.

Earnings Revision / Risk

• We make slight increment to our earnings forecasts, factoring in better minorities interest.

Valuation / Recommendation

Maintain BUY and target price of S$1.30.

• This is DCF-based (WACC of 6.1% and terminal growth of 2.5%).

Share Price Catalyst

• Potential catalysts include:
  1. Faster-than-expected ramp-up of new specialist extension, and
  2. successful execution in the launch of its new hospitals in China.

Source: UOB Kay Hian Research - 26 Feb 2019