Brokers’ take: CGS-CIMB upgrades Raffles Medical to ‘add’ but lowers target on China’s zero-Covid policy

CGS-CIMB has upgraded Raffles Medical from “hold” to “add”, albeit with a lower target price of S$1.27, down from S$1.33 previously.

CGS-CIMB analyst Tay Wee Kuang on Saturday (Jul 9) revised his estimates on expectations that revenue from Covid-19-related services could fall about 60 per cent in FY2022 to FY2024 as Singapore moves towards an endemic Covid-19.

“Even though the latest wave of infections suggests that the Singapore government could once again step up collaboration efforts with private healthcare providers like Raffles Medical, we believe the intensity of such efforts will be much lower, given the smaller scale of operations for Covid-19 testing, vaccinations, as well as management of community facilities,” said Tay.

The earnings gap, he expects, will likely be bridged by a recovery in medical tourism and the return of domestic patients undergoing elective treatments that had been deferred over the last 2 years. Tay noted the group’s year-to-date acute private hospital admissions/specialist outpatient visits had improved to 84 and 97 per cent of pre-Covid levels respectively, up from 80 and 67 per cent in FY2020.

Meanwhile, the group’s healthcare arm in China is likely to see prolonged “gestation woes” as China extends its zero-Covid policies. Tay believes this will further delay Raffles Medical’s earnings before interest, taxes, depreciation and amortisation (Ebitda) breakeven by a year from operations at its new hospitals in Chongqing and Shanghai.

The analyst has hence revised his target price estimates, pegging it to 16 times the estimated enterprise value to Ebitda ratio. The target price of S$1.27 also represents a 9 per cent upside to the counter’s trading price, which closed flat at S$1.11 on Tuesday.