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Brokers' take: UOB Kay Hian maintains 'buy' on Raffles Medical

UOB Kay Hian has maintained a "buy" call on Raffles Medical Group, citing limited near-term impact on the private healthcare provider over regulatory changes in healthcare insurance policies.

It was announced last week in Parliament that new insurance policies with riders or existing policyholders buying a new rider will need to fork out at least 5 per cent of the hospital bill. This is aimed at addressing over-consumption and overcharging, which has led to rising insurance premiums for all policyholders.

In a report dated March 13, UOB Kay Hian analyst Andrew Chow wrote: "The segment that would be impacted by this change would be patients that rely on insurance coverage, which would exclude most of RMG's (Raffles Medical Group) foreign in-patients."

He estimates that 12-18 per cent of Raffles Medical's FY17 pre-tax profits could be exposed to the insured market. He also noted that the group's business model helps it to avoid over-consumption, due to its focus on a good outcome for patients rather than profitability. All in-patient treatment and operations are also subject to a peer review by a panel of medical doctors, which helps avoid unnecessary procedures or treatment.

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He has set a target price of S$1.32 for the stock.

However, in the short-term, Raffles Medical's net profits could "decline gradually" as it expands its footprint and are expected to trough in 2019 when it opens its new hospital in Shanghai.

"Thereafter, we expect a gradual recovery and the utilisation of its new hospitals in Chongqing and Shanghai to rise after their opening in Q4 2018 and 2H 2019 respectively," wrote Mr Chow.

"Although RMG's earnings outlook for the next two years is expected to be lacklustre, its long-term growth potential will be significantly enhanced in the next decade due to a near quadrupling of capacity."

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