Downgrade to HOLD as Risk Reward Turns Neutral

• Raffles Medical Group (SGX:BSL)'s 1H20 PATMI fell 38.2% y-o-y to SGD17.2m, missing our/ consensus forecasts amid challenging conditions due to Covid-19. Excluding China operations, PAT would have fallen only 3.7%.
• We trim FY20-22E EPS by 4-5% although our DCF-based Target Price stays at SGD0.99 (WACC: 9%, LTG: 3%) as tweaks were mostly non-cash.
• Due to insufficient upside, we downgrade Raffles Medical to HOLD, although we are positive towards
  1. the returning of local patients; and
  2. secular growth from population aging and new China hospitals.

Revenue Resilience as Raffles Medical Aids in Covid-19 Battle

• Raffles Medical's 1H20 revenue fell 5.4% y-o-y to SGD241.4m. Hospital services declined 14.5% y-o-y due to deferrals for elective surgeries and fewer offshore patients. This was cushioned by a 6.8% increase in healthcare services division from services to tackle Covid-19 in Singapore (e.g. air-border screening, swabbing of foreign workers, etc).
• Revenue was also shored up by government-subsidised patients to keep public hospital capacity for Covid-19 patients. Raffles Medical has also obtained a licence for Covid-19 PCR and serology testing.

Local Patients Are Returning

• In Jun-20, all key services resumed with the relaxation of the circuit breaker and local patient volumes are beginning to recover to pre-Covid- 19 levels. If conditions permit, Raffles Medical is keen to open Raffles Hospital Shanghai within this year, or in early FY21. Raffles Hospital Chongqing’s EBITDA loss run-rate is still expected to be contained within SGD2-3m per quarter (comparable to FY19).

Return of Foreign Patients Is the Key Swing Factor

• Our new FY20E PATMI assumes a 38% h-o-h recovery, largely driven by the normalisation of local volumes, but offset by reduced government wage support and tapering in revenue from Covid-19-related services.
• In our view, the key swing factor for Raffles Medical’s recovery profile is how quickly foreign patient revenue (around 25-30%) can be regained. We see the return of lockdown measures as a key earnings downside risk.

Source: Maybank Kim Eng Research - 27 Jul 2020