Analysts are mostly keeping a “neutral” stance on Raffles Medical Group BSL (RMG), following its FY2023 ended Dec 31, 2023 results, which saw the group’s results normalise from the Covid-19 boost it enjoyed.
To recap, RMG on Feb 26 announced that its FY2023 patmi came in at 490.2 million, 37.1% lower y-o-y on the discontinuance of Covid-19-related activities. Earnings per share stood at 4.85 cents, compared to the 7.71 cents recorded in FY2022.
For the full year, the company posted revenue of $706.9 million, down 14.1% from the $822.9 million recorded in FY2022. The decline in revenue was mainly due to the discontinuance of Covid-19 related activities in FY2023. The lack of revenue contribution from this led to the group’s healthcare services division revenue to decline to $283.4 million from $445.0 million a year ago. This was the only revenue segment that experienced a significant decline.
The group’s investment holdings division saw a slight decline at $45.2 million in FY2023, compared to $45.9 million a year. Both the hospital services and insurance services divisions saw growth but were not able to completely offset the decline in the healthcare services division. Hospital services revenue gained 4.5% y-o-y to $330.6 million, while the group’s health insurance arm RafflesHealthInsurance (RHI) that makes up the insurance services division, saw revenue growth of 25.6% y-o-y to $144.5 million.
A final dividend on 2.4 cents were proposed, representing 49.4% of the group’s FY2023 Patmi.
The results are in line with DBS Group Research’s prediction and analyst Rachel Tan expect FY2024 to see a full-year normalisation of earnings post-Covid-19.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
“As such, this could cap the share price upward momentum. In the medium term, we remain positive about the prospects of its China operations with a further upside from its fourth hospital in the long term,” says Tan, while noting that FY2022 was the group’s strongest earnings in history.
On the long-term, she is also positive on the group, as the positive trend of the healthcare industry is expected to prolong.
Key data to watch that could cause a further re-rating include stronger organic growth from Singapore operations; the normalisation of cost inflation, with lower utility costs in FY2024 and a potential price increase to offset the earnings; and the ramp-up of China hospitals at a much faster pace than expected, with success in improving operational efficiencies.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
UOB Kay Hian too has kept its “hold” call and $1.15 target price, as results came in marginally above expectations
“The hospital operations reported a robust performance driven by increased patient intake and cost pass-through, offset by the impact of the strong Singapore dollar. Healthcare services segment suffered from lack of Covid-19-related revenue but is likely to stabilise in 2024,” notes analysts Llelleythan Tan and Heidi Mo.
“Moving into 2024, we reckon that earnings have bottomed out in 4QFY2023 and would improve sequentially in 1HFY2024,” they add.
In 2HFY2023, staff costs have increased to 42% of revenue, from the shortage of nurses in Singapore, inflationary pressures and higher competition faced from the public healthcare sector. The analysts expect staff costs as a percentage of turnover to normalise to the historical pre-pandemic levels of around 50% moving forward.
“Together with sustained gestation losses from RMG’s China hospitals and higher insurance claims, margins are likely to continue being pressured, in our view,” they say.
“Although we are bullish on RMG’s expansion in China/Vietnam and potential new acquisitions in the medium to long term, we see limited upside potential in share price performance given increasing margin pressure and ongoing gestation losses from the Chinese hospitals. In our view, we reckon that RMG is fairly valued at current price levels,” say Tan and MO.
Similarly, Maybank Securities continues to rate RMG “hold” with a lower target price of $1.15 from $1.30 previously. Despite undemanding valuations, analyst Eric Ong has retained his call and lowered the target price due to limited re-rating catalysts in the near-term. Ong has also reduced FY2024-FY2025 EPS forecasts by about 26% due to a more conservative revenue run-rate and margin assumptions.
For more stories about where money flows, click here for Capital Section
While Ong also points out the group’s normalising financials, in line with industry trends, he is upbeat on the group’s China operations, as he believes that it is on the right trajectory.
According to management, Raffles Hospitals in China are becoming more well-known and patient numbers have grown across-the-board. While its hospitals in Shanghai and Chongqing are still in the developmental phase and continue to incur gestational costs, the group believes its China operations remain on track to achieve Ebitda breakeven by 2025 with improving operating efficiencies through right-sizing and better rationalisation of resources of its three existing hospitals in the country.
Meanwhile, RMG updated that it is partnering with the Ministry of Health (MOH) to operate step-down care facilities at Singapore Expo and its flagship Raffles Hospital with 176 additional beds dedicated to the transitional care facilities (TCF) programme.
“While this will help to gain the economies of scale, we think the margin is unlikely to be as good as before. Leveraging on its strong net cash of $273 million, the group is also looking at opening new clinics in Japan and Vietnam as it seeks to further expand its presence across the region,” says Ong.
PhillipCapital too has maintained its “neutral” call on RMG with a lower target price of 96 cents from $1.02 previously.
“The absence of high-margin pandemic-related services such as vaccination and testing was the major drag on earnings. Other activities pulling down margins were lower revenue per bed from transitional care facilities (TCF) and high loss ratios in their insurance business as patient claims normalised,” says analyst Paul Chew.
In the near-term, Chew does not expect any recovery in margins and expects price pressure from the TCF to linger due to aggressive competition.
Meanwhile, with the strong Singapore currency, the group’s is seeing some weakness in foreign patient volume as they seek cheaper alternatives and improves healthcare services in the region.
Hence, the group intends to expand overseas. Already its presence in China is improving. Last year was effectively the first full year of operation for the group’s new hospital in China, absent the pandemic interruptions, which contributed to 2HFY2023 revenue grew 20% y-o-y. RMG is gradually gaining traction with foreign corporations operating in China.
“Ebitda break-even will require two to three years, but patient load is building momentum as marketing efforts intensify,” says Chew.
“Containing the decline in earnings will be progressive price increases in Singapore hospitals and narrowing losses in China,” he adds.
CGS-CIMB Research however remains bullish on the stock, as analyst Tay Wee Kuang has reiterated his “buy” recommendation on RMG but with a lower target price of $1.16 from $1.20 previously.
Tay notes the normalised financial results, as well as the likely lower margins from the upcoming TCF with MOH, but margin recovery is expected for the group’s hospital services. Given the slower pick up in revenue from China where RMG has been operating two gestating hospitals (Shanghai and Chongqing), Tay thinks that the margin improvement suggests better contribution from its Singapore hospital operations.
He also believes that the group is well-positioned for its overseas expansion. With the group’s net cash position, Tay believes that this allows the group to explore both greenfield and brownfield expansion overseas, given limited opportunities for organic growth in Singapore.
Shares in RMG closed at $1.02 on Feb 28, some 28.2% lower in the past 12 months.
