Raffles Medical Group (RMG) on Jul 29 posted its 1HFY2024 ended June results which saw patmi decline by 48.8% y-o-y to $30.6 million, while revenue was 1.4% down y-o-y to $365.7 million. This was primarily due to the cessation of Covid-19 activities, which discontinued progressively from 1HFY2023.
Following the expected lacklustre earnings, analysts are keeping a “hold” on RMG, as the group lack near-term growth prospects.
Maybank Securities has reiterated its “hold” call and dropped its target price to $1.10 from $1.15 previously, as RMG lack near-term re-rating catalysts.
Analyst Eric Ong sees the group’s core hospital services as its “only bright spot”. Despite slow medical tourism recovery, hospital services posted revenue growth with PBT margin expanding by 3.1 percentage points (ppt) to 8.5% on higher average selling price (ASP), which helps to cover some of the inflationary costs such as wages and consumables.
The group will now focus on growing and consolidating its three existing hospitals in China. For 1HFY2024, China operations turnover grew 5.9% y-o-y to $30.5 million along with stronger patient loads. While still in the developmental phase, management believes that the Shanghai and Chongqing hospitals are on track to reduce gestational losses as utilisation rates continue to improve.
Not surprisingly, healthcare services recorded lower revenue and PBT due to the cessation of Covid-19 related activities. Earlier this year, the group added 176 beds to its capacity and started receiving patients in 1HFY2024, to support transitional care facilities (TCF) with the Ministry of Health (MOH).
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Meanwhile, Insurance arm (RHI) topline rose 28.9% y-o-y to $86.2 million, while higher claims and a higher loss ratio were generally in line with industry trends. Consequently, the segment’s operating loss widened to $6.4 million compared to $1.3 million a year ago.
In Jun 2024, RFMD opened its second medical centre in Hakata, Fukuoka, to serve locals, expatriates, and tourists in the precinct. “We understand this new centre is in addition to the group’s first medical centre in Osaka, which started operating in Sept 2015. Management remains on the lookout for new business opportunities in the region given its robust net cash position of $247 million,” says Ong.
On the other hand, DBS Group Research is also keeping its “hold” call and decreasing its target price on RMG to 97 cents from $1.00 previously.
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While the group recorded lower earnings, analysts Amanda Tan and Andy Sim remain upbeat that the group has benefitted from the strong recovery of local and foreign patients post-pandemic in Singapore. They expect FY2024 to see a full-year of earnings normalisation post-pandemic. As such, this could cap the share price’s upward momentum.
“We continue to have a long-term positive outlook on Raffles Medical due to the healthcare industry's long-term positive trajectory and the potential for its China hospitals to ramp up as they reach stabilisation and breakeven in the medium-term,” say the analysts.
The DBS analysts too view the group’s insurance arm as a “wild card”, while acknowledging the adoption of the new SFRS(I) 17 accounting standard, which requires upfront recognition of certain insurance expenditures, thereby affecting the group’s bottomline.
RHB Bank Singapore maintains its "neutral" stance on RMG with a lower target price of $1.00 from $1.06, as recurring profit came in below expectations due to higher costs.
"While longer-term growth remains driven by overseas operations (China and, likely, Vietnam), we see limited rerating
catalysts in the near term. Instead, we note potential earning headwinds from higher operating costs, lower numbers of foreign patients, and sustained losses in its insurance business," says analyst Shekhar Jaiswal.
Meanwhile, Jaiswal notes that the group will continue to operate the TCF at Changi Expo until Feb 2025, but the contract to operate 176 beds dedicated to the TCF programme at its hospital will last for five years. The TCF contract margins are expected to be lower, and RMG believes the contribution from this TCF business could be volatile, depending on the timing and bed utilisation.
CGS International on the other hand has a more bullish view on the counter as it has kept its "add" call but with a slightly lower target price of $1.15 from $1.16.
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Analyst Tay Wee Kuang notes that while the 1HFY2024 lacklustre results were expected, things are normalising and the group should start to see growth from here on. He says: "We believe RMG saw its earnings bottom in 1HFY2024 and should steadily improve moving forward... We see scope for net profit to grow in 2HFY2024 on both y-o-y and h-o-h basis."
He is however cautious of the group's insurance arm, which has tipped the scales and caused higer losses despite higher revenues.
As at 4.00pm, shares in RMG are trading at 97 cents, meeting DBS’ target price.
