Hospitals│Singapore February 6, 2015
COMPANY NOTE
Raffles Medical Group RFMD SP / RAFG.SI
Market Cap
Avg Daily Turnover
Free Float
US$1,678m
US$0.76m
47.7%
S$2,258m
S$0.99m
553.8 m shares
Current
S$4.00
Target
S$4.47
Prev. Target
S$4.50
Up/Downside
11.7% Conviction|
|
Preparing to double the dosage
Notes from the Field
The well-known, long-term investment merits of 1) rising affluence, 2) ageing population and 3) medical tourism, are not new. The only cap was capacity. 2015 is a year of building, from which new capacity will sprout in 2016, almost doubling Raffles Medical’s (RMG) capacity. ————————————————————————————————————————
Kenneth NG, CFA T (65) 6210 8610 E
[email protected]
Jonathan SEOW T (65) 6210 8671 E
[email protected] Company Visit Channel Check
Expert Opinion Customer Views
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Contents
The completion of the Raffles Hospital extension and Holland Village will lift the capacity cap and drive 19% earnings CAGR in FY16-18. While that is a clear positive, we have to revise our FY15-16 EPS down by 8-9% to reflect higher depreciation costs, following a transition of analyst coverage. Our target price falls, now based on the CY16 EV/EBITDA peer average of 21x (prev. SOTP). Secondary catalysts include its China expansion plans.
STRUCTURAL GROWTH, JUST LACK OF CAPACITY ..... 5 TWO KEY CONCERNS GRADUALLY LESS IMPORTANT 7
New capacity in FY16
SECONDARY CATALYSTS ................................................ 9
Since its opening in 2001, Raffles Hospital has not seen any significant increase in capacity until recently. The hospital extension (S$310m cost, 40% paid, expected completion end-16) will add 220k sf of space (+73% increase) in phases over 2016. Full contribution from the new space could settle in by 2017 as RMG can lease out unused space quite easily. We expect better allocation and deployment of facilities and wards, plus economies of scale to boost margins. In addition, Raffles Holland Village adds another 65k sf of space in a facility where DBS sits as anchor tenant. RMG will occupy 20% of the space initially. The focus on hospital
VALUATION AND RECOMMENDATION ............................ 9
Vol m
Price Close
131.0 126.0 121.0 116.0 111.0 106.0 101.0 96.0
Feb-14
May-14
Aug-14
Nov-14
Source: Bloomberg
52-week share price range 4.00 4.07
3.05
4.47 Current
Target
Concerns addressed Following an industry-wide increase in nurses’ wages, recent concerns centred on staff cost (~50% of FY13 sales) pressure. These cost pressures are not new and affect the entire industry; one should, therefore, expect these costs to be absorbed into billings eventually. The cost strain was compounded by weakness in medical tourism receipts, especially as a decline in the rupiah led to fewer Indonesian patients. RMG’s foreign patient load recorded single-digit growth in 9M14 vs ~13% in the past five years. That concern should ease as Indonesia’s latest fuel price hike has made the rupiah more stable recently.
Expansion into China Management has indicated that it is still finalising its potential investment stake in Shenzhen and Shanghai. We continue to wait for more clarity and view them as long-term catalysts.
Financial Summary
Relative to FSSTI (RHS)
4.30 4.10 3.90 3.70 3.50 3.30 3.10 2.90 3 2 2 1 1
services (25% EBIT margin) is likely to lift the group’s blended margins as hospital services are more profitable than healthcare services (9% EBIT margins).
Revenue (S$m) Operating EBITDA (S$m) Net Profit (S$m) Core EPS (S$) Core EPS Growth FD Core P/E (x) DPS (S$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x)
Dec-12A 311.6 74.3 56.85 0.10 0.0% 40.81 0.045 1.13% 27.98 37.5 (21.2%) 5.61
Dec-13A 341.0 102.6 84.89 0.11 12.4% 36.26 0.050 1.25% 18.92 13.1 (55.1%) 4.69 14.1%
Dec-14F 375.9 89.9 71.25 0.13 15.9% 31.37 0.050 1.25% 23.46 NA (23.8%) 4.32 14.3% (1.03%) 1.04
Dec-15F 422.6 102.0 78.16 0.14 8.5% 28.85 0.050 1.25% 21.93 NA (3.8%) 3.94 14.3% (8.95%) 1.01
Dec-16F 489.7 119.3 89.82 0.16 14.9% 25.11 0.050 1.25% 18.79 100.7 (2.5%) 3.56 14.9% (8.55%) 1.01
SOURCE: CIMB, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA
Raffles Medical Group│Singapore February 6, 2015
PEER COMPARISON
Research Coverage Bloomberg Code BCH TB BGH TB BH TB IHH SP KPJ MK RFMD SP
Bangkok Chain Hospital Bangkok Dusit Med Service Bumrungrad Hospital IHH Healthcare KPJ Healthcare Raffles Medical Group
Market TH TH TH SG MY SG
Recommendation ADD ADD REDUCE ADD HOLD ADD
Rolling P/BV (x)
Mkt Cap US$m 662 9,596 3,530 11,724 1,134 1,678
Price 8.65 20.20 158.0 1.93 3.98 4.00
Target Price 9.30 23.80 125.0 2.16 4.10 4.47
Upside 7.5% 17.8% -20.9% 11.9% 3.0% 11.7%
12-month Forward Rolling FD P/E (x)
12.00
50.0
45.0 10.00
40.0 35.0
8.00
30.0 6.00
25.0 20.0
4.00
15.0 10.0
2.00
5.0 0.00 Jan-10
Jan-11
Jan-12
Bangkok Chain Hospital Bumrungrad Hospital KPJ Healthcare
Jan-13
0.0 Jan-10
Jan-14 Bangkok Dusit Med Service IHH Healthcare Raffles Medical Group
Jan-11
Jan-12
Jan-13
Bangkok Chain Hospital Bumrungrad Hospital KPJ Healthcare
Peer Aggregate: P/BV vs ROE
Jan-14 Bangkok Dusit Med Service IHH Healthcare Raffles Medical Group
Peer Aggregate: 12-mth Fwd FD P/E vs FD EPS Growth
6.00
40.0%
5.00
33.3%
4.00
26.7%
3.00
20.0%
2.00
13.3%
1.00
6.7%
50.0
150%
45.0
130%
40.0
110%
35.0
90%
30.0
70%
25.0
50%
20.0
30%
15.0
10%
10.0
-10%
5.0 0.00 Jan-10
0.0%
Jan-11
Jan-12
Rolling P/BV (x) (lhs)
Jan-13
Jan-14
-30%
0.0 Jan-10
Jan-15
ROE (See Footnote) (rhs)
-50%
Jan-11
Jan-12
Jan-13
12-mth Fwd FD P/E (x) (See Footnote) (lhs)
Jan-14
Jan-15
FD EPS Growth (See Footnote) (rhs)
Valuation
Bangkok Chain Hospital Bangkok Dusit Med Service Bumrungrad Hospital IHH Healthcare KPJ Healthcare Raffles Medical Group
FD P/E (x) (See Footnote) Dec-13 Dec-14 33.17 43.01 49.89 40.45 54.31 48.59 92.63 58.84 25.98 31.23 36.26 31.37
Dec-15 33.44 34.07 43.82 40.39 29.99 28.85
Dec-13 5.44 7.69 12.02 2.28 3.75 4.69
P/BV (x) Dec-14 5.18 6.91 10.48 2.30 3.19 4.32
Dec-15 4.81 6.18 9.18 2.23 3.01 3.94
Dec-13 22.55 32.24 30.41 30.83 18.83 18.92
EV/EBITDA (x) Dec-14 26.37 28.60 27.39 21.09 15.03 23.46
Dec-15 21.81 25.18 25.00 17.21 14.29 21.93
Dec-15 14.9% 19.2% 26.5% 5.6% 10.3% 14.3%
Dividend Yield Dec-13 Dec-14 1.85% 1.40% 0.99% 1.00% 1.20% 1.22% 0.39% 0.39% 0.96% 1.51% 1.25% 1.25%
Dec-15 1.50% 1.24% 1.35% 0.39% 1.51% 1.25%
Growth and Returns
Bangkok Chain Hospital Bangkok Dusit Med Service Bumrungrad Hospital IHH Healthcare KPJ Healthcare Raffles Medical Group
FD EPS Growth Dec-13 -42.7% -1.5% 27.9% -20.9% -20.8% 12.6%
(See Footnote) Dec-14 Dec-15 -22.9% 28.6% 23.3% 18.7% 11.8% 10.9% 57.4% 45.7% -16.8% 4.1% 15.6% 8.7%
ROE (See Footnote) Dec-13 Dec-14 15.4% 12.3% 16.2% 18.0% 27.8% 27.3% 2.5% 3.9% 9.7% 11.0% 14.1% 14.3%
SOURCE: CIMB, COMPANY REPORTS Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends. NPAT/EPS values for calculations and valuations are based on recurring and normalised values for GAAP and IFRS accounting standard companies respectively.
2
Raffles Medical Group│Singapore February 6, 2015
BY THE NUMBERS
Share price info Share px perf. (%)
1M
3M
12M
Relative
-2.8
-0.9
17.2
Absolute
1.8
3.4
32.0
Major shareholders Raffles Medical Holdings Pte Ltd Loo Choon Yong
% held 34.2 10.1
P/BV vs ROE 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Rolling P/BV (x) (lhs)
14.350% 14.310% 14.270% 14.230% 14.190% 14.150% 14.110% 14.070% 14.030% 13.990% 13.950%
12-mth Fwd FD Core P/E vs FD Core EPS Growth
35.0
50%
30.0
39%
25.0
27%
20.0
16%
15.0
4%
10.0
-7%
5.0
-19%
0.0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
-30%
12-mth Fwd Rolling FD Core P/E (x) (lhs)
ROE (See Footnote) (rhs)
FD Core EPS Growth (rhs)
Profit & Loss Depreciation is expected to increase due to the Raffles Hospital extension and Raffles Holland Village development.
(S$m) Total Net Revenues Gross Profit Operating EBITDA Depreciation And Amortisation Operating EBIT Financial Income/(Expense) Pretax Income/(Loss) from Assoc. Non-Operating Income/(Expense) Profit Before Tax (pre-EI) Exceptional Items Pre-tax Profit Taxation Exceptional Income - post-tax Profit After Tax Minority Interests Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit Recurring Net Profit Fully Diluted Recurring Net Profit
Dec-12A 311.6 120.6 74.3 (7.9) 66.4 0.2 0.0 0.0 66.6
Dec-13A 341.0 132.7 102.6 (8.3) 94.3 0.9 0.0 0.0 95.2
Dec-14F 375.9 152.2 89.9 (9.4) 80.5 1.0 0.0 0.0 81.4
Dec-15F 422.6 169.0 102.0 (13.6) 88.3 1.0 0.0 0.0 89.3
Dec-16F 489.7 195.9 119.3 (17.7) 101.6 1.0 0.0 0.0 102.5
66.6 (9.4)
95.2 (9.9)
81.4 (9.8)
89.3 (10.7)
102.5 (12.3)
57.2 (0.4)
85.3 (0.4)
71.7 (0.4)
78.6 (0.4)
90.2 (0.4)
56.8 52.9 52.9
84.9 60.6 60.6
71.2 71.2 71.2
78.2 78.2 78.2
89.8 89.8 89.8
Cash Flow
Capex for Raffles Hospital expansion and Raffles Holland Village will be spread across FY14-16. RMG has a strong cash balance (S$266m in FY13) and strong operating cash flows to fund these capex.
(S$m) EBITDA Cash Flow from Invt. & Assoc. Change In Working Capital (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow Net Interest (Paid)/Received Tax Paid Cashflow From Operations Capex Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow Cash Flow From Investing Debt Raised/(repaid) Proceeds From Issue Of Shares Shares Repurchased Dividends Paid Preferred Dividends Other Financing Cashflow Cash Flow From Financing Total Cash Generated Free Cashflow To Equity Free Cashflow To Firm
Dec-12A 74.3
Dec-13A 102.6
Dec-14F 89.9
Dec-15F 102.0
Dec-16F 119.3
3.1
4.4
6.0
0.3
13.8
(1.5) (0.2) (9.0) 69.5 (9.7)
(21.3) (0.0) (10.4) 71.2 (8.2)
0.0 1.0 (9.8) 94.8 (210.0)
0.0 1.0 (10.7) 95.3 (170.0)
0.0 1.0 (12.3) 112.4 (90.0)
(0.7) (10.5) (1.5) 4.4
119.3 111.2 (15.2) 6.1
0.0 (210.0) 1.2 7.0
0.0 (170.0) 0.0 0.0
0.0 (90.0) 0.0 0.0
(9.2)
(10.0)
(28.2)
(28.2)
(28.2)
(6.3) 52.8 57.6 59.3
(19.0) 163.4 167.2 182.4
(19.9) (135.1) (113.9) (115.1)
(28.2) (102.9) (74.7) (74.7)
(28.2) (5.8) 22.4 22.5
SOURCE: CIMB RESEARCH, COMPANY
3
Raffles Medical Group│Singapore February 6, 2015
BY THE NUMBERS
Balance Sheet
We forecast RMG’s cash to drop to account for its capex, and also maintain its low level of debt.
(S$m) Total Cash And Equivalents Total Debtors Inventories Total Other Current Assets Total Current Assets Fixed Assets Total Investments Intangible Assets Total Other Non-Current Assets Total Non-current Assets Short-term Debt Current Portion of Long-Term Debt Total Creditors Other Current Liabilities Total Current Liabilities Total Long-term Debt Hybrid Debt - Debt Component Total Other Non-Current Liabilities Total Non-current Liabilities Total Provisions Total Liabilities Shareholders' Equity Minority Interests Total Equity
Dec-12A 102.5 38.2 5.4 0.0 146.1 153.9 194.5 0.2 0.0 348.6 19.7
Dec-13A 265.9 44.2 9.1 0.0 319.2 153.7 100.4 0.2 0.0 254.2 4.8
Dec-14F 130.8 41.2 9.1 0.0 181.0 354.3 100.4 0.2 0.0 454.8 6.0
Dec-15F 27.9 46.3 10.2 0.0 84.4 510.6 100.4 0.2 0.0 611.2 6.0
Dec-16F 22.1 53.7 11.8 0.0 87.6 582.9 100.4 0.2 0.0 683.5 6.0
66.3 17.5 103.6
72.7 20.1 97.5
75.1 28.4 109.5
84.4 28.4 118.8
97.8 28.4 132.2
0.0 0.0 1.7 105.2 388.4 1.0 389.4
0.0 0.0 2.1 99.6 472.5 1.3 473.8
0.0 0.0 2.1 111.6 522.6 1.7 524.3
0.0 0.0 2.1 121.0 572.5 2.1 574.6
0.0 0.0 2.1 134.4 634.2 2.5 636.7
Dec-12A 0.0% 0.0% 23.8% 0.15 0.71 282 14.1% 43.1% 44.83 10.43 127.1 58.3% N/A
Dec-13A 9.4% 38.2% 30.1% 0.47 0.85 1,925 10.4% 32.6% 44.10 12.72 121.8 82.9% 21.4%
Dec-14F 10.2% (12.4%) 23.9% 0.22 0.93 1,609 12.0% 39.6% 41.47 14.80 120.6 70.4% 16.1%
Dec-15F 12.4% 13.5% 24.1% 0.04 1.02 1,767 12.0% 36.1% 37.79 13.86 114.8 29.3% 16.0%
Dec-16F 15.9% 17.0% 24.4% 0.03 1.12 2,032 12.0% 31.4% 37.36 13.70 113.5 22.4% 16.7%
Dec-12A N/A N/A 62.0% N/A 180.0 N/A N/A
Dec-13A N/A N/A 60.0% N/A 180.0 N/A N/A
Dec-14F N/A N/A 65.0% N/A 190.0 N/A N/A
Dec-15F N/A N/A 68.0% N/A 200.0 N/A N/A
Dec-16F N/A N/A 68.0% N/A 220.0 N/A N/A
Key Ratios Revenue Growth Operating EBITDA Growth Operating EBITDA Margin Net Cash Per Share (S$) BVPS (S$) Gross Interest Cover Effective Tax Rate Net Dividend Payout Ratio Accounts Receivables Days Inventory Days Accounts Payables Days ROIC (%) ROCE (%)
Key Drivers No. Of Patient Admissions (m P.a.) Revenue Per Patient Bed (S$) Occupancy Rate Of Beds (%) Average Length Of Stay (days) Beds Opened (units) Bed Turnover A Year (x) % of fgn patients to patient load
SOURCE: CIMB RESEARCH, COMPANY
4
Raffles Medical Group│Singapore February 6, 2015
Preparing to double the dosage STRUCTURAL GROWTH, JUST LACK OF CAPACITY Private hospital revenues are a long-term growth story In recent years, the demand for Singapore private hospitals has exceeded supply. The drivers of 1) an ageing population in Singapore, 2) a demand for (perceived) higher-quality care and an ability to pay for it as affluence rises, 3) Singapore’s reputation as a medical hub, attracting demand from regional population bases, all add to the equation. Raffles Medical’s revenue from hospital services, since its official opening in March 2002, racked up a CAGR of 19% vs. a 2.2% population CAGR over the same period. Even the demand for less acute healthcare services (clinics and GP services) has grown at a steady CAGR of 8% vs. the 2.2% population CAGR. We also note that growth in private hospital admissions in recent years has overtaken that of public hospital admissions (4.9% CAGR vs 2.9%), indicating a shift from public hospitals to private hospitals for secondary and tertiary care, a symptom that is to be expected with rising affluence. The widening of private healthcare market share vs. public market share is already a clear trend. The capacity limitation of private sector facilities is a secondary effect. Between 2010 and 2013, the private sector’s percentage of market share of total admissions rose by 1.3% pts while its share of total beds rose by only 0.8% pts. The capacity limitation of Raffles Medical is long known. New capacity is finally being built and we are optimistic that this is clearly a case of “build-it-and-they-will-come”. We expect the added capacity from the hospital extension to fuel growth for RMG’s hospital segment. Figure 1: CAGR of 18.8% for revenue from hospital services
Figure 2: CAGR of 7.5% for revenue from healthcare services
250.0
Title: Source:
140.0
217
194
200.0
167
CAGR 18.8%
123
120
103
Please fill in the values above to have them entered in your rep
100.0
89
145
150.0
115
CAGR 7.5%
120.0
94
81
130
80.0
99
70 55
60.0
100.0
61
55
61 53
74 60 50.0
33
38
40.0
46
20.0
0.0
0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Hospital Services (S$m)
Healthcare Services (S$m)
SOURCES: CIMB, COMPANY REPORTS
SOURCES: CIMB, COMPANY REPORTS
Figure 3: Private sector hospital admissions have outpaced the public sector Total admissions Public sector admissions Private sector admissions yoy growth (public) yoy growth (private) Private sector as % of total admissions Private sector as % of total beds
2009 423,249 332,595 90,654 0.8% -1.0%
2010 437,529 343,332 94,197 3.2% 3.9%
2011 456,461 357,026 99,435 4.0% 5.6%
2012 468,795 362,458 106,337 1.5% 6.9%
2013 483,002 373,022 109,980 2.9% 3.4%
CAGR 3.4% 2.9% 4.9% -
21.4% N.M.
21.5% 13.6%
21.8% 13.5%
22.7% 14.6%
22.8% 14.4%
-
SOURCES: CIMB, COMPANY REPORTS, MINISTRY OF HEALTH SINGAPORE
5
Raffles Medical Group│Singapore February 6, 2015
Raffles Hospital extension to drive hospital services revenues and group blended margins up RMG acquired the new extension premises in Jan 2014. Groundbreaking for the extension building started in Dec 2014. We expect it to be completed in phases from 2H16, with all facilities completed by end-2016. 40% of the S$310m cost is expected to be paid by FY14 and the remaining cost of ~S$170m can be taken care of by the net cash (S$119m) and FY15-16 operational cash flows (S$208m). We see no threat to current dividends. The combined Raffles Hospital old wing and extension will yield a GFA of about 530k sf (+73%, current 307k sf). We understand that RMG will use about a quarter of the new space initially while leasing the rest out. The new extension will house specialist outpatient clinics, diagnostic services, an endoscopy and day surgery ward, a radiotherapy suite and training facilities. Some facilities will move over from the old wing, freeing up space for more beds in the old wing. We especially like the linking of the extension on all floors to the existing building to integrate operations for optimal patient flow. We think this will improve operating margins in the long run as RMG leverages its existing facilities to spread some fixed costs. Also, as this additional capacity drives hospital services, we expect group blended margins to trend up from 2017 onwards as hospital services grow faster than healthcare services. Over the past five years, the hospital segment has enjoyed higher operating margins of c.25-26% versus the healthcare segment’s c.8-9%. Figure 4: Margins of hospital services, healthcare services and group 50%
Hospital Services as a % of total sales (RHS) Hospital Services operating margins Healthcare Services operating margins Group operating margins
70%
40%
59% 30%
53%
60% 59%
61% 61%
62%
64%
62% 61% 63%
64%
65% 60%
55% 50%
20%
46% 40% 10%
37% 38% 0%
30% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
SOURCES: CIMB, COMPANY REPORTS
Raffles Holland Village is a secondary growth engine The new hospital extension wing is the main course in the RMG growth story; the new outlet in Holland Village is the icing on the cake. Construction on the 5-storey commercial building is underway and is expected to be completed in 1Q16. RMG intends to use 9k sf of a total GFA of 65k sf (about 20% of estimated NLA) for expansion of its medical and specialist services in the area. The remaining space will be leased to DBS Bank (about 10% of NLA), retailers and other F&B tenants. Overall, we estimate that the rental portion could contribute up to S$2.4m to the group’s bottomline (approximately 4% of FY13 core net profit).
6
Raffles Medical Group│Singapore February 6, 2015
Figure 5: Breakdown of Raffles Holland Village Total estimated NLA based on GFA of 65,000 sf
45,500
For own use as outpatient medical and specialist clinics
9,000
To lease to DBS
4,500
Remainder to be leased to retail shops and F&B outlets
32,000
Estimated rental income Rental revenue assuming 90% occupancy and S$10 psf
$3,996,000
Net contribution assuming 60% margins
$2,397,600 SOURCES: CIMB, COMPANY REPORTS
Pioneer Generation (PG) package could boost healthcare services Revenues from Raffles’ healthcare services rose by 14-16% yoy in 9M14, compared to an average of about 9% yoy in the past five years. In addition to a higher patient load, this was largely driven by the increased provision of healthcare insurance services, which account for 5-10% of total revenue. Going forward, we think that healthcare services will also benefit from the Pioneer Generation (PG) package that commenced on 1 September 2014. The majority of Raffles Medical clinics are Community Health Assist Scheme (CHAS) accredited. From our channel checks, we estimate that the difference between Raffles Medical and a polyclinic for a standard cough or cold, with a PG card, is about 50%. Figure 7: Price to be paid at Raffles Medical vs. a polyclinic, after PG subsidies
Figure 6: PG card subsidy amount at CHAS-accredited clinics
Additional amount you would need to pay at RMG vs polyclinics
Subsidy Coverage
Subsidy Amount
Common illnesses
$28.50
Type of illness
$90 per visit, capped at $360 per year
Common cough/cold $5 (50% more)
Chronic conditions
Simple
Migraine
Complex $135 per visit, capped at $540 per year $21 to $266.50 per procedure (dependent on procedure) Selected dental services Note: Visit Ministry of Health Singapore website for detailed breakdown and applicable conditions
$3 (40% more)
Note: These amounts include consultation and medicine. They only serve as a gauge and could vary depending on the type of medication, complications etc.
SOURCES: CIMB, MINISTRY OF HEALTH SINGAPORE
SOURCES: CIMB, COMPANY REPORTS
TWO KEY CONCERNS GRADUALLY LESS IMPORTANT The business can cope with rising labour costs The two most pertinent concerns for RMG have been the sustainability of operating margins and whether Singapore will remain a viable hub for medical tourism. On the first concern, we show that RMG is generally able to sustain its margins, even in the face of intermittent years of labour cost spikes. Using the yoy wage change of health and social service workers in Singapore as a proxy for RMG’s staff cost pressures, we notice that 1) there seems to be intermittent cost pressures every three years, 2) there is a 1-year lag where margins soften after a wage spike, 3) this negative correlation between wage cost pressure and group operating margins is more evident in the last five years, and 4) in the early years (2003-08) when capacity utilisation of the newly established Raffles Hospital was rising, operating leverage negated the ill-effects of wage cost pressure. We are hopeful that going forward, the additional capacity from the new hospital extension can negate cost pressures.
7
Raffles Medical Group│Singapore February 6, 2015
Figure 8: Negative correlation between group op margins (%) and yoy wage changes (% yoy) especially evident in recent years when capacity was not growing 25% Margins unaffected
20.5%
21.8%
23.3% 22.7% 22.2% 22.7% 22.2%
7% Margins affected
20%
16.7% Margins unaffected
10.0%
11.2%
Margins affected (forecast)
14.3%
15%
8%
6% 5%
12.0%
4%
10%
Wage pressure
Wage pressure
5%
Wage pressure
Wage pressure
3% 2% 1%
0%
0% 2003
2004
2005
2006
2007
2008
2009
Group operating margins (LHS)
2010
2011
2012
2013
2014F
Wage changes of healthcare workers (yoy)
Linear (Wage changes of healthcare workers (yoy))
SOURCES: CIMB, COMPANY REPORTS, MINISTRY OF MANPOWER STATISTICS SINGAPORE
Notwithstanding the abovementioned hope of operating leverage mitigating staff cost pressure, another mitigating factor is the healthcare business’s general ability to pass through cost pressures. Our analysis shows that from 2009 to 2013, Singapore’s healthcare CPI increased at a quicker pace than RMG’s cost of sales (CAGR of 3.2% vs 0.8%). In the near term, we could see a slight increase of staff costs as a percentage of sales in preparation for the additional capacity but these costs will eventually flow through its billings as capacity picks up. Figure 9: Staff costs to sales (%) spiked in 2013 (more hiring, steep wage hike) but dropped in 9M14 as patient charges rose 52.0%
Figure 10: Healthcare CPI vs. COGS (as % of sales): we see the effect of a cost pass-through as CPI rose faster than COGS
51.6%
Title: Source:
115.0
51.0% 51.0%
110.0
Please fill in the values above to have them entered in your rep
49.9% 50.0% 105.0
49.0%
48.8% 48.9%
49.0%
48.4%
48.4% 48.0%
100.0
48.0% 95.0
47.0%
46.0%
90.0 2006
2007
2008
2009
2010
2011
2012
2013
9M14
2009
Staff costs as % of sales
2010 Healthcare CPI
SOURCES: CIMB, COMPANY REPORTS
2011
2012
2013
COS as a % of sales
SOURCES: CIMB, COMPANY REPORTS, MINISTRY OF HEALTH SINGAPORE
Medical tourism: 2014 posed some challenges; should recede in 2015 In 9M14, revenue from hospital services rose 4-7% yoy (average of 13% yoy over last five years). We attribute the lacklustre hospital performance to the decline in foreign patients, particularly from Indonesia. Foreign patients traditionally account for 30-35% of total patients, with Indonesians forming the largest group at approximately 5-7% of all patients. The slower growth was attributed to elections and a weaker rupiah. However, while we acknowledge that these factors will impact RMG’s growth, we think the long-term investment thesis for Raffles is still intact. The fundamental attraction is Singapore’s world-class 8
Raffles Medical Group│Singapore February 6, 2015
reputation of healthcare services and that has not changed. Regional medical tourists come to Singapore for specialist care and critical surgery because of the strong reputation for critical medicine. Singapore is also attractively located at the heart of Southeast Asia and actively works with healthcare partners in neighbouring countries to expand its referral networks. Further, Singapore ranks first in Asia (fourth in the world) in the Medical Tourism Index, published by the International Healthcare Research Centre, owing to its good facilities and services. An analysis of the average bill size across private hospitals targeting a similar patient profile (i.e. affluent domestic patients and medical tourists) would also suggest that Raffles Hospital is best placed to benefit from negative external pressures as it is the most competitively priced. We acknowledge that this comparison only serves as a guide and has not been standardised for the different range of medical specialties in each hospital. Furthermore, this only includes inpatient bills and excludes day surgery bills, which are becoming an increasingly important source of revenue. Nonetheless, we think this is fairly representative of the relative positions of the hospitals’ respective prices. Figure 12: Average inpatient bill size per day stay in hospital: RMG is the most competitively priced vs Gleneagles & Mt E
Figure 11: S$/rupiah exchange rate
Hospitals
12,000
Thomson Medical Centre 10,000
Title: Source:
Average Per Day (S$) 2,821
Relative to Raffles Hospital -41%
3,154
-34%
Mount Alvernia Hospital Parkway East Hospital
8,000 6,000 4,000
Please fill in the3,702 values above to have -23% them entered in your rep
Raffles Hospital
4,803
Gleneagles Hospital
5,192
0% 8%
Fortis Surgical Hospital
5,482
14%
Mount Elizabeth Hospital
5,737
19%
Mounth Elizabeth Novena Hospital
6,310
31%
2,000 0
SGD/IDR
SOURCES: CIMB, BLOOMBERG
SOURCES: CIMB, COMPANY REPORTS, MINISTRY OF HEALTH SINGAPORE
SECONDARY CATALYSTS China RMG has yet to finalise its JVs in Shenzhen and Shanghai. Our understanding is that management is still in talks with the respective partners and could be open to increasing its stake in these projects, even up to 100% from the 70% previously indicated. The potential investment in both projects is in the range of S$350m-400m. We continue to wait for more clarity on these projects and view them as long-term catalysts.
VALUATION AND RECOMMENDATION Raffles hospital extension and Holland Village to contribute from FY16 We revise our FY15-16 EPS downwards by 8-9% to factor in higher depreciation costs from 1) the S$310m investment in Raffles hospital extension, and 2) S$120m investment in Raffles Holland Village. We anticipate some contribution in FY16 upon scheduled completion, with full contribution in FY17 as operating leverage ramps up. Notwithstanding initial start-up costs, we expect margins to improve.
9
Raffles Medical Group│Singapore February 6, 2015
Current valuations below peer group average We revise our valuation methodology from SOTP and now value Raffles Medical at its peer average 12m forward EV/EBITDA of 21x. We prefer EV/EBITDA as 1) it offers more comparability given that it is a relative valuation methodology, 2) it is capital-structure neutral, and 3) it eliminates differences arising from ownership versus rental of property, given that net profit can be distorted by high depreciation and interest costs. We view the current valuation of 18.6x CY16 EV/EBITDA as an attractive level to buy the stock. Raffles Medical has earnings CAGR of 12.3% over FY14-16, 14.9% ROE and CY15 dividend yield of 1.3%, which is in line with its peer group. Figure 13: Raffles Medical Group’s valuation
Enterprise value Net Debt/(Cash) Minority interests Equity value (S$ m) Shares outstanding (m) Implied per share value (S$)
Basis End-CY16 EBITDA End CY16 End CY16 MVE = EV - Net debt - MI
EBITDA Multiple 119 21.0
Value 2,506 -16 2 2,519 564 4.47
SOURCES: CIMB, COMPANY REPORTS
Figure 14: Raffles Medical Group's 12m forward EV/EBITDA trading band (x)
Figure 15: Raffles Medical Group's 12m forward P/E trading band (x)
30.0x
Title: Source:
40
0.16
35
25.0x
0.14
20.0x
15.0x
10.0x
5.0x
0.0x
30
0.12
25
0.10
20
0.08
15
0.06
10
0.04
5
0.02
0
-
EV/EBITDA
Current core P/E
SOURCES: CIMB, COMPANY REPORTS
EPS
Current core P/E
Please fill in the values above to have them entered in your report
Recurring EPS
SOURCES: CIMB, COMPANY REPORTS
Figure 16: Peers Comparison
Company Raffles Medical Group IHH Healthcare Bangkok Chain Hospital Bangkok Dusit Med Service Bumrungrad Hospital KPJ Healthcare Apollo Hospitals Enterprise Ltd Simple average
Bloomberg Ticker RFMD SP IHH SP BCH TB BGH TB BH TB KPJ MK APHS IN
Recom.
Price (lcl curr)
Target Price (lcl curr)
Market Cap (US$ m)
Add Add Add Add Reduce Hold Add
4.01 1.94 8.95 19.60 157.0 3.96 1,295
4.47 2.16 9.30 23.80 125.0 4.10 1,290
1,682 11,755 684 9,311 3,508 1,129 2,917
EV/EBITDA (x) CY2014 CY2015 22.0 19.6 27.0 27.7 27.4 14.2 24.2 23.1
21.4 17.1 22.6 24.7 25.0 13.9 20.6 20.8
3-year EPS CAGR (%)
P/B (x) CY2014
Recurring ROE (%) CY2014
Dividend Yield (%) CY2014
10.4% 27.7% 2.4% 17.0% 10.3% 0.3% 16.2% 12.1%
4.33 2.31 5.36 6.71 10.41 3.17 5.65 5.42
14.9% 4.2% 12.5% 18.2% 27.4% 11.4% 12.3% 14.4%
1.2% 0.4% 1.3% 1.0% 1.2% 1.5% 0.5% 1.0%
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG
10
Raffles Medical Group│Singapore February 6, 2015
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Raffles Medical Group│Singapore February 6, 2015
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Raffles Medical Group│Singapore February 6, 2015
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Investment Banking clients (%)
Add
58.4%
6.0%
Hold
29.4%
4.3%
Reduce
12.2%
1.0%
Spitzer Chart for stock being researched ( 2 year data ) Raffles Medical Group (RFMD SP) Price Close
4.50
4.57
3.89
3.68
3.81
3.81
Recommendations & Target Price
3.50
4.10
3.52
4.30 3.90 3.70
3.50 3.30
3.10 2.90 Add
2.70 Feb-13
Outperform
Jun-13
Hold
Neutral
Oct-13
Reduce
Underperform
Feb-14
14
Trading Buy
Jun-14
Trading sell
Oct-14
Not Rated
Raffles Medical Group│Singapore February 6, 2015
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014. AAV – Very Good, ADVANC – Very Good, AEONTS – not available, AMATA - Good, ANAN – Very Good, AOT – Very Good, AP - Good, ASK – Very Good, ASP – Very Good, BANPU – Very Good , BAY – Very Good , BBL – Very Good, BCH – not available, BCP - Excellent, BEAUTY – Good, BEC - Good, BECL – Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC – Good, BLA – Very Good, BMCL - Very Good, BTS - Excellent, CCET – Good, CENTEL – Very Good, CHG – not available, CK – Very Good, CPALL – not available, CPF – Very Good, CPN - Excellent, DELTA - Very Good, DEMCO – Good, DTAC – Very Good, EA - Good, ECL – not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA Excellent, HEMRAJ – Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD – Good, IVL - Excellent, JAS – not available, JUBILE – not available, KAMART – not available, KBANK - Excellent, KCE - Very Good, KGI – Good, KKP – Excellent, KTB - Excellent, KTC – Good, LH - Very Good, LPN – Very Good, M - not available, MAJOR - Good, MAKRO – Good, MBKET – Good, MC – Very Good, MCOT – Very Good, MEGA – Good, MINT Excellent, OFM – Very Good, OISHI – Good, PS – Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH – Very Good, RATCH – Very Good, ROBINS – Very Good, RS – Very Good, SAMART - Excellent, SAPPE - not available, SAT – Excellent, SAWAD – not available, SC – Excellent, SCB - Excellent, SCBLIF – Good, SCC – Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA – Very Good, STEC - Good, SVI – Very Good, TASCO – Good, TCAP – Very Good, THAI – Very Good, THANI – Very Good, THCOM – Very Good, THRE – not available, THREL – Good, TICON – Good, TISCO - Excellent, TK – Very Good, TMB - Excellent, TOP - Excellent, TRUE – Very Good, TTW – Very Good, TUF - Good, VGI – Very Good, WORK – not available.
CIMB Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months. Sector Ratings Overweight Neutral Underweight
Definition: An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings Overweight Neutral Underweight
Definition: An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.
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