• We increase 2022F earnings forecast for Raffles Medical (SGX:BSL) by 33%, 2023F-2024F earnings by 9-12%, and roll forward our valuation to 2023F. Raffles Medical’s 9M22 profit accounted for more than our earlier 2022F full-year forecast.
• While the decline in COVID-19-related revenue was in line with expectations, the drop in related costs was faster and higher than expected, implying better-than-expected margin. We are still positive on its long-term growth, which remains dependent on the ramp up of its China operations.

Raffles Medical's 9M22 Business Update

• The higher foreign patient load from the reopening of Singapore’s borders and the return of Singapore residents who postponed their elective surgeries have helped boost Raffles Medical’s hospital business. The healthcare business has already witnessed patient load that is higher than in 2019 (pre-pandemic period).
• While COVID-19- related revenue was down y-o-y, the group saw better-than-expected margin amidst better cost control and deployment of manpower, together with lower inventories and consumables used as well as a reduction in purchased and contracted services.
• In 3Q22, Raffles Medical's revenue grew 6.5% y-o-y to S$199.5m, while profit increased 62.1% y-o-y to S$23.6m. For 9M22, revenue increased 9.6% y-o-y to S$581.8m and profit increased 57.3% y-o-y to S$98.2m.

Short-term Headwinds Expected

• We expect COVID-19-related revenue and its associated costs to decline to negligible levels in 2023. Also, in line with management, we believe that the supply chain and labour constraints may lead to higher operating costs and negatively impact Raffles Medical’s current elevated margin. Moreover, we expect its China business, especially operations at its Shanghai hospital, to see a gradual ramp-up in operations in 2023.
• Management maintained that the EBITDA breakeven period for its China operations remains unchanged at 2-3 years, implying that the Shanghai hospital could make EBITDA losses during 2023–2025.

Adjusting Earnings and Moving Our Valuation Basis Forward

• On the back of a better-than-expected 9M22 profit, we have adjusted 2022 earnings forecast for Raffles Medical higher by 33%. We believe the moderation in margin could be more gradual in 2023, and hence, adjust our 2023F-2024F earnings higher by 9–12%. We also roll forward our valuation basis from blended forward to 2023F earnings.
• Our target price for Raffles Medical includes a 2% ESG premium over a fair value estimate.
• Keep BUY recommendation on Raffles Medical, with new S$1.65 target price from S$1.60, 24% upside and ~2% FY23F yield.

Source: RHB Invest Research - 2 Nov 2022