Amid a healthcare crunch, transitional care facilities (TCF) like that offered by Raffles Medical Group (RFMD) BSL will benefit from their inclusion into Singapore’s healthcare ecosystem, say UOB Kay Hian (UOBKH) Research analysts Llelleythan Tan and John Cheong.
“With an ongoing demand-supply imbalance for public hospital beds, patients are being funnelled to private hospitals and step-down care facilities such as TCFs. As new additional public bed capacity would only be added from 2024 onwards, the Singapore government has indicated for longer term plans for TCFs to be included into the country’s healthcare system, benefitting private TCF operators such as RFMD,” write Tan and Cheong in a March 28 note.
The UOBKH analysts maintain “buy” on RFMD with a higher target price of $1.90 from $1.85 previously. The new target price represents a 32.7% upside against a last traded price of $1.43.
RFMD is a healthcare provider that operates medical clinics, imaging centres, and medical laboratories. It provides general and specialised medical, medical evacuation, medical advisory and dental treatment services.
Tan and Cheong point to a supply-demand imbalance. “During the Covid-19 XBB infection wave in 4Q2022, Singapore’s public hospitals faced a hospital bed crunch as both Covid-19 and non-Covid-19 patients swarmed public hospitals’ emergency departments.”
According to the Ministry of Health (MOH), average wait times for emergency cases that required hospital admission increased from seven hours during 9M2022 to 50 hours in 4Q2022.
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Public hospital bed occupancy had risen to 93.1% in 2022, from 87.6% pre-Covid-19, driven by longer stays and the Covid-19 pandemic.
The longer waiting times were largely due to a mismatch of demand and supply, write Tan and Cheong.
On the demand side, there was an ongoing structural increase in patients with the highest acuity driven by an ageing population. This was made worse by additional visits from Covid-19 patients during a Covid-19 infection wave.
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On the supply side, additional beds from public healthcare facilities that were initially planned to open in 2022 were postponed due to Covid-19 related construction disruptions, which could have freed up hospital beds. Also, public hospitals had to set aside beds for Covid-19 patients, further straining capacity.
To free up hospital beds, MOH has implemented several initiatives. From 2024 onwards, more hospital beds would be added as public healthcare facilities like the Woodlands Health Campus and Tan Tock Seng Hospital Integrated Care Hub progressively open.
MOH is also working with private operators to accept emergency patients from public hospitals, benefiting private hospitals such as Raffles Hospital, which is under the Emergency Care Collaboration (ECC) programme.
Most importantly, patients are also being funnelled to step-down care facilities, such as the TCFs run by private operators.
There are currently five TCFs in operation, with one to be set up in the west near Ng Teng Fong General Hospital.
During a parliamentary debate on March 23, Singapore’s health minister mentioned that the TCFs would be retained and become “a medium or even long-term feature of our healthcare system”, note Tan and Cheong.
Singapore’s Covid-19 White Paper states: “In particular, Transitional Care Facilities have proven very useful during a pandemic crisis for relieving the burden on acute hospitals, and we will explore expanding them further.”
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Currently operating one TCF in the east, RFMD is set to benefit from the Singapore government’s renewed focus on TCFs.
Favourable tailwinds
With tight public hospital bed capacity, RFMD’s domestic hospital is set to see robust patient loads as hospital patients are diverted to Raffles Hospital Singapore via the ECC programme.
Coupled with the return of foreign patients, domestic elective surgeries and the ramp-up of RFMD’s Chinese operations, UOBKH analysts expect FY2023 ending December segmental revenue from the hospital services to grow by 24.5% y-o-y.
TCFs are here to stay, note Tan and Cheong. “With this new development, we now expect the TCF to operate till June 2024 minimally, given that there is no additional bed capacity till 1H2024 as new public healthcare facilities progressively open.”
RFMD boasts “healthy margins due to its asset-light nature”, say Tan and Cheong.
TCFs contribute nearly 40% of RFMD’s FY2022 operating profit. This would help support RFMD’s profit for FY2023-FY2024, add the analysts.
As the TCF business model is confidential due to its partnership with MOH, UOBKH analysts have little guidance on its revenue and profitability. “However, we reckon that the TCF’s margins are healthy due to it being assetlight. We estimate that FY2022 Covid-19 revenue (TCF and vaccination centres) was around $240 million, of which a greater contribution of $180 million-$200 million was from the TCF as most vaccination centres were shut down/consolidated by 1H2022 due to a fully vaccinated population.”
Pre-pandemic (pre-2020), healthcare operating margins were constant at around 6%-8%, note Tan and Cheong. “Assuming the same margins for FY2022 non-Covid-19 services, we estimate that FY2022 Covid-19 services would have operating margins of 63.1%.”
RFMD had annual cost savings of $67 million y-o-y in FY2022. “With domestic inflationary pressures and a shortage of nurses in Singapore, we expect staff costs to inch back up to the historical average of 50%,” say Tan and Cheong.
Adding back $50 million of staff costs to FY2022, the analysts estimate normalised operating margins for the TCF to be 35%-40%. Based on this, RFMD’s TCF would have contributed around 35%-40% of the group’s overall FY2022 annual operating profit, add the analysts.
Taking a conservative view, UOBKH analysts have used -0.5 standard deviations to account for the possibility that the Singapore government reverses its policy and TCFs are made redundant. “However, the likely extension of TCFs has removed one of the very few short-term overhangs facing RFMD. Coupled with favourable tailwinds, we like RFMD for its cheap FY2023 P/E valuation (19.6x) compared to regional peers (35.8x).”
As at 1.51pm, shares in Raffles Medical are trading flat at $1.43.
