Brokers’ take: Analysts cut Raffles Medical targets on earnings miss

ANALYSTS have cut price targets for Raffles Medical Group : BSL 0%but stayed positive on its long-term growth, : BSL 0%after the medical service provider reported disappointing Q3 financials on Monday (Nov 6).

Both Maybank Securities and UOB Kay Hian (UOBKH) downgraded the counter to “hold” from “buy” with trimmed price targets.

Maybank lowered its target price to S$1.30 from S$1.65, after cutting its profit estimates for the three upcoming financial years by 25 per cent to 27 per cent, due to lower topline and margin assumptions.

The brokerage also trimmed its earnings per share forecast for FY2023 down 26.8 per cent to S$0.0468. The lowered target price of S$1.30 implies a 29.2 times price-to-earnings (PE) ratio.

Referring to the counter’s market close price of S$1.20 before the Q3 financials’ release, the brokerage noted that its shares were trading at a PE ratio of 33 times – above the market average of 30.5 times, which factors in its Singapore-listed peers Q&M Dental and IHH Healthcare.

Maybank analyst Eric Ong noted that even considering the high base last year, the earnings still came “way below” market expectations.

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This is because Raffles Medical still recorded S$60 million in profit after tax and minority interests for the first half year, despite tapering Covid-19 activities.

For the third quarter, the group registered a 67.4 per cent drop in net profit after tax at S$12.4 million. Its nine-month profit stood at S$72.8 million, 25.6 per cent down from the year before.

Slow recovery in domestic hospital services

Ong noted that the group’s healthcare services division dragged down Q3 turnover, and the slight, positive growth in the hospital segment might be driven by local patients, as foreign volumes are still below pre-Covid levels.

He highlighted that the relative strength of the Singapore dollar against regional currencies hurt foreign patient visits.

UOBKH analysts Tan Yi Rong and Heidi Mo shared the view on a sluggish recovery of its Singapore hospital segment.

“In addition to increased medical bills, elevated hotel and transport expenses have likely deferred some of the group’s higher-billing foreign patients to cheaper alternatives such as Malaysia and Thailand, leading to permanent demand loss and lower margins for the segment.

“Nonetheless, we maintain our expectations that the hospital segment would face a slow and gradual recovery instead of a V-shaped recovery,” said Tan and Mo, adding that potential upside may come from a weaker Singapore dollar in 2024.

They lowered its PE-based price target to S$1.15 from S$1.47, after slashing net profit estimate for FY2023 to S$86.1 million from S$105.8 million, because of lower overall margins assumptions.

“We expect margins to contract further as a result of gestation losses from its China operations, higher insurance claims and elevated operating costs.”

The analysts noted that the trimmed target price is pegged to the same PE multiple of 29 times, the group’s long-term average mean PE, to UOBKH’s estimates for FY2024 earnings.

The brokerage has lowered its net profit forecasts to S$74.6 million from S$94.2 million for FY2024, and to S$79.3 million from S$93.1 million for FY2025.

Long-term positive growth

“Although we are bullish on Raffles Medical Group’s expansion in China and Vietnam, and potential new acquisitions in the medium to long term, we only expect an inflection point sometime in 2025,” added Tan and Mo, agreeing with Ong’s view that the proposed acquisition in Ho Chi Minh City will not contribute to near-term growth.

Similarly, DBS Group Research cut its price target for Raffles Medical Group to S$1 from S$1.48 with a maintained “hold” call, after revising earnings estimates for FY2023-FY2024 down by 36 per cent to 47 per cent.

DBS analyst Rachel Tan noted that the estimates revision is to factor in a further potential normalisation of earnings, given an “exceptionally high base” in FY2022.

The S$1 price target is based on 20 times the revised earnings forecast for FY2024, plus S$0.20 per share for the hospitals in China.

“Nevertheless, we remain long-term positive on Raffles Medical, led by the long-term positive trend of the healthcare industry and potential ramp-up of its China hospitals as it reaches stabilisation and breakeven in the medium term,” Tan said.

Shares of Raffles Medical were trading down 4.7 per cent, or S$0.05, to S$1.02 as at 2.17 pm on Tuesday.