Brokers' take: CGS-CIMB upgrades Raffles Medical to 'add' with higher S$1.22 target price

CGS-CIMB on Friday upgraded Raffles Medical Group to "add" from "hold", citing its position as a key private player supporting Covid-19 testing, especially as the dominant tester for Changi Airport.

The research house expects that Raffles Medical's Covid testing activities will continue to ramp up and drive revenue growth, bumping its target price for the group up to S$1.22, from S$1.10 previously.

In a report, CGS-CIMB analyst Cezzane See forecasts that testing will grow threefold to approximately 6,000 tests a day in FY2021, to mirror the growth in Singapore's daily testing efforts after the resurgence in community cases from a more transmissible strain of the virus.

This is compared to an implied average of 2,200 tests a day over nine months from the start of the pandemic in FY2020.

Extensive and frequent testing could be here to stay as the economy reopens, with the emergence of newer strains of the Covid-19 virus, Ms See said, adding that recent cases of vaccinated personnel being infected with newer strains of the virus have also shown the importance of mass-testing capabilities even with high vaccination rates.

Ms See believes the boost in testing will lift Raffles Medical's revenues and net profit from FY2021 to FY2023 and has raised earnings per share (EPS) estimates for the period.

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"We like Raffles Medical's position in Changi Airport as a key Covid-19 test provider for inbound travellers which could provide further EPS upside for more testing once borders reopen," she added, noting that Raffles Medical is also supporting the Republic's vaccination drive, which will in turn help its own growth.

In January, the group was awarded S$4.7 million to operate 12 out of 37 community vaccination centres alongside the vaccination centre at Changi Airport Terminal 4. Two of its clinics have also been designated as vaccination locations.

Ms See said Covid-19-related services propelled revenue growth in the second half of FY2020, reversing the decline in the first half of the year, which came about as patients deferred elective surgeries for fear of contracting the virus while visiting healthcare facilities, and as medical tourism slipped.

CGS-CIMB estimates that Raffles Medical's Covid-19-related services amounted to about S$83 million in FY2020 and attributes the majority to Covid-19 testing. The remainder likely came from facilities management revenues for community care facilities, air border temperature screening and workers' dormitories.

Comparing it to fellow healthcare provider Q&M, Ms See noted that Raffles Medical does not manufacture its own test kits, which could potentially lower its margins in comparison. However, unlike Q&M, it manages and operates community care facilities.

Furthermore, there is a steadier supply of tests for Raffles Medical, which had been contracted to conduct air border temperature screening services when required since the SARS outbreak in 2003, she said.

As at 1.08pm on Monday, shares of Raffles Medical Group were trading at S$1.12, up S$0.04 or 3.7 per cent.