RHB Group Research analyst Shekhar Jaiswal has kept a “buy” rating on Raffles Medical with a target price of $1.50 as he sees the group as having a “sound long-term growth” and “reasonable valuation” at its current share price levels.
Jaiswal’s target price represents a 33.9% upside to Raffles Medical’s share price of $1.12 as at the time of writing on July 25. His target price, which includes a 2% environmental, social and governance (ESG) premium, is based on a fair value of $1.48.
“We recognise that investors are concerned about Raffles Medical’s flattish FY2022 profit growth amidst lower contribution from Covid-19 related revenue in Singapore, rising inflation, and slower than earlier guided growth in its China business,” the analyst writes. “However, we remain optimistic on Raffles Medical’s Singapore operations gradually reverting to normal, which will help offset some decline in Covid-19 related revenue and eventually drive growth in 2023 and beyond.”
Jaiswal expects Raffles Medical’s Singapore hospital business to witness higher occupancy and billings, driven by the return of domestic patients undergoing elective treatments that were deferred during the Covid-19 pandemic as well as from the return of some foreign patients to Singapore. “This, in addition to normalised business operations for Singapore healthcare clinics, would help Raffles Medical offset the drop in Covid-19 related revenues in the near term and support growth in 2023 and beyond,” he observes.
The analyst also notes that China, which accounts for around 7% of Raffles Medical’s revenue, should also see higher revenue beyond 2023.
Of late however, the diversion of resources into China’s zero-Covid-19 approach has forced multiple private hospitals to suspend services they relied upon for revenue. “We believe China’s zero Covid-19 policy impacted Raffles Medical China’s operations as well,” writes Jaiswal.
Raffles Medical’s Chongqing hospital was expected to see an Ebitda breakeven by end 2022, which could now be delayed by a year, according to the analyst. Raffles Medical was supposed to see meaningful revenue contribution from its Shanghai hospital in 2022. “However, we now believe this higher revenue contribution will now be delayed into 2023,” Jaiswal says.
The analyst currently maintains that the Shanghai hospital will achieve an Ebitda breakeven by end-2024, as per the original estimate. “We believe Raffles Medical’s China hospitals have a strong long-term growth outlook as private hospitals accounted for only around 15% of total patient visits in 2020,” he writes. “This percentage, we believe, has the potential to grow further in coming years.”
At present, Raffles Medical’s FY2023 P/E and EV/Ebitda are below its peers’ average, according to Jaiswal.
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Overall, while Raffles Medical’s focus will be on ramping up China operations, once the country gradually relaxes its stringent Covid-19 related restrictions, Jaiswal believes that the company’s $91 million net cash position should enable it to look at inorganic growth opportunities within the region.
As at 10.19am, shares in Raffles Medical are trading flat at $1.13 at an FY2022 P/B ratio of 2.2x and dividend yield of 2.4%.
