Analysts downgrade, trim TP on Raffles Medical after 'margins collapsed' in 3QFY2023

Raffles Medical Group posted profit after tax of $12.4 million for the 3QFY2023 ended Sept 30, 67.4% lower y-o-y.

Analysts have downgraded or cut their target prices on Raffles Medical Group Bsl after it posted profit after tax of $12.4 million for the 3QFY2023 ended Sept 30, 67.4% lower y-o-y.

Among four research houses, PhillipCapital Research head Paul Chew has issued the most severe cut. In a Nov 8 note, Chew downgrades Raffles Medical to “neutral” from “buy” with a lower target price of $1.02, down from $1.76.

Raffles Medical’s margins have collapsed, notes Chew. “Margin weakness was from the loss of high-margin vaccination and testing services. Other expenses such as utilities and staff costs continue to climb. There were only moderate price increases during the period.”

Revenue, too, was down sharper than expected, says Chew. “We believe the drag in revenue came from lower pandemic-related vaccination and test service at the clinics and centres and softer foreign patient revenue. Revenue at the GP clinics is normalising back to pre-pandemic levels. Foreign patient volumes are below expectations due to the rising cost in Singapore.”

Chew says he had expected weaker earnings as pandemic-related revenue comes to an end. “But some of the weakness was to be offset by higher prices, foreign patients and the Transitional Care Facilities (TCF). Foreign patients' admissions were softer than expected due to rising costs in Singapore and price increases were moderate.”

Today, Raffles Medical no longer operates any joint vaccination and testing centres (JVTCs), and its TCF at the Changi Expo is providing stepped-down care.

Meanwhile, Maybank Securities analyst Eric Ong cites “limited near-term catalysts” and downgrades Raffles Medical to “hold” from “buy” in a Nov 6 note, while trimming his target price to $1.30 from $1.65 previously.

3QFY2023 net profit after tax came in “way below our and market expectations”, says Ong. “This took 9MFY2023 earnings to $72.8 million, down 25.6% y-o-y, which forms 61% of Maybank’s forecasts for FY2023. Even considering the high base last year, we deem the results as disappointing given the group still recorded revenue of $371 million and patmi of $60 million in 1HFY2023 notwithstanding the tapering of Covid-19 activity.”

According to management, patient visits to the group’s China operations have increased with the end of Covid-19 restrictions early this year. Although revenue has improved, its hospitals in Shanghai and Chongqing are still in the developmental phase and continue to incur gestational costs.

To achieve better operating efficiencies, Raffles Medical has started rationalising its China operations by shifting its resources to specialties with higher demand, as well as deploying some of its nurses from Chongqing to its Shanghai hospital.

Ong cuts his FY2023-2025 profit estimates by 25%-27% due to lower topline and margin assumptions.

Moderating from a high base

Raffles Medical has benefitted from the strong recovery of local and foreign patients post Covid-19 in Singapore, notes DBS Group Research analyst Rachel Tan, but its earnings growth will moderate in FY2023 ended December given the “exceptionally high base” of last year.

In FY2022, Raffles Medical delivered its strongest earnings in history, 80% above that of its last high in 2013, when it recorded a disposal gain. “Given the moderation seen in 3QFY2023 post the normalisation of healthcare activities, we lower our FY2023-2024 earnings by 36% to 47% and expect earnings to likely bottom in FY2024 should the trajectory continue.”

This could cap the share price upward momentum, she adds. In a Nov 7 note, Tan is maintaining “hold” with a lower target price of $1.00 from $1.48 previously. “In the medium term, we remain positive on the prospects of its China operations with a further upside from its fourth hospital in the long term.”

CGS-CIMB Research analyst Tay Wee Kuang notes that only revenue and profit after tax were disclosed for 3QFY2023, and “no granularity of its financials beyond revenue and PAT was provided”.

In a Nov 7 note, Tay is keeping “add” on Raffles Medical with a lower target price of $1.20 from $1.77 previously.

For Raffles Medical’s flagship hospitals in Chongqing and Shanghai, management guided for ongoing gestational losses for three years of their operations before EBITDA breakeven by the end of the third year, or FY2025.

Management also shared that Raffles Medical’s health insurance arm RHI saw more claims during the quarter, which negatively impacted Raffles Medical’s profitability as some health insurance policies offered by RHI covers healthcare services provided by public hospitals and other private hospitals.

Management noted that the higher quantum of claims was a result of both higher number of claims, as well as medical cost inflation, and RHI is considering revising its insurance premiums to offset higher costs, notes Tay.

As at 3.47pm, shares in Raffles Medical are trading 3 cents higher, or 2.97% up, at $1.04.

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