1H22F preview: earnings transition
? RFMD’s share price has fallen 18% YTD; we believe investors are wary of the earnings gap left behind by Covid-19-related services in FY21.
? We estimate a c.10% decline in core net profit in 1H22F, with the return of BAU cases offsetting lower contribution from Covid-19 services.
? Upgrade to Add from Hold with a lower TP of S$1.27 on more palatable valuations with a change in valuation methodology from SOP previously.
Normalisation of Covid-19 efforts from FY21
Based on RFMD’s FY21 annual report, we estimate that Covid-19-related services contributed at least 20% of FY21 revenues (Fig 1). With Singapore’s move towards endemicity, we expect revenue from Covid-19-related services to decline by c.60% in our FY22-24F forecasts. Even though the latest wave of infections suggests that the Singapore government could once again step up collaboration efforts with private healthcare providers like RFMD, 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 (Fig 2).
Return of BAUs to bridge the earnings gap
According to data from MOH, YTD acute private hospital admissions/specialist outpatient visits have returned to 84%/97% of pre-Covid (i.e. FY19) levels as of May, after declining to 80%/67% in FY20 at the start of the pandemic (Fig 6 and 7). We believe the recovery has been primarily driven by the return of domestic patients undergoing elective treatments that had been deferred over the last two years, and the partial return of foreign patients as medical tourism ramps up as Singapore reopened its borders more extensively in Apr.
Covid-zero stance in China prolongs gestation woes
Various parts of China entered into sporadic lockdowns during 1H22F, including cities such as Shanghai and Beijing. We expect operations at its new hospitals in Chongqing and Shanghai to delay EBITDA breakeven by a year, with aggregate breakeven for its China hospitals expected in FY24F (Fig 8). Nevertheless, start-up costs are managed by opening bed capacities in phases. RFMD had also shared that it was able to contain costs within its guided range of EBITDA losses through cost control measures.
Upgrade to Add with a lower TP of S$1.27 on new valuation method
Our new TP is pegged to 16x FY23F EV/EBITDA, i.e. 0.5 s.d. below its 5-year historical mean, reflecting the valuation overhang from an extended gestation period of its new China hospitals. The change in valuation method from SOP previously is due to a lack of information regarding RFMD’s China operations. Re-rating catalysts include a quicker turnaround of its new China hospitals, and a swifter return of foreign patients, while downside risks include prolonged losses in China and potential earnings downgrades by the market given the earnings slowdown in FY22F as RFMD weans off Covid contributions.