1H22: Outperformance Led By COVID-19 Revenue
RFMD reported 1H22 PATMI of S$59.7m (+51.3% yoy), exceeding our expectations. Outperformance was led by the healthcare services segment, backed by higher clinic visitation rates and contributions from COVID-19 revenue. Domestically, hospital patient loads are improving as foreign patients start to return while elective surgeries have ramped up. In China, continuous lockdowns have impacted operations, especially in Shanghai. Upgrade to BUY with a higher PE-based target price of S$1.42.
• 1H22 results exceeded our expectations. For 1H22, Raffles Medical Group’s (RFMD) revenue (+11.2% yoy, +0.6% hoh) and PATMI (+51.3% yoy, +33.0% hoh) exceeded our expectations, forming 59.2% and 82.3% of our full-year forecasts respectively. The strong outperformance was largely led by robust revenue growth and margin expansion in the healthcare services segment. 1H22 operating margin expanded (+6.3ppt yoy, +5.4ppt hoh) due to a better product-mix from lesser PCR testing revenue and better cost efficiency from staff reallocation/lesser consumables used. As a result, PATMI margin also expanded (+4.1ppt yoy, +3.8ppt hoh). Moving forward, with higher utilities and manpower costs, we reckon that RFMD may increase prices to support margins.
• Mixed segmental performance. Excluding intersegment revenue, 1H22 healthcare services revenue grew (+22.0% yoy, +4.4% hoh) while hospital services revenue was down (-5.0% yoy, -6.1% hoh). The increase in healthcare services revenue was a result of better COVID-19 revenue contributions and robust growth in medical clinic revenue. Revenue from hospital services softened due to the removal of PCR testing revenue, mitigated by the return of foreign patients. Revenue from China dropped by 4.0% hoh due to strict lockdowns in key cities such as Shanghai. However, on a yoy basis, RFMD’s Chinese revenue grew by 5.2%.
• Healthcare services: Star performer. Exceeding expectations, 1H22 healthcare services revenue formed 80.2% of our 2022 full-year segmental forecast, led by stronger than-expected COVID-19 revenue from the Community Treatment Facilities (CTF) and higher outpatient clinic revenue. With relaxed social distancing measures, visitation rates at RFMD’s clinics have already crossed pre-pandemic levels, further boosted by positive COVID-19 patients seeking medical attention. RFMD currently operates two out of six
vaccination centres and all four of the CTFs in Singapore. As Singapore experienced a COVID-19 wave in 1H22, RFMD saw improved COVID-19 revenue contribution from these services. Based on our estimates, 1H22 COVID-19 revenue was at S$110mS$120m. However, moving forward, management has noted that COVID-19 revenue from these services is expected to taper off as COVID-19 cases dwindle.
• Hospital services: Recovery on track. 1H22 hospital services revenue formed 39.4% of our 2022 full-year segmental forecast, in line with expectations. As noted by management, RFMD’s hospitals have experienced an increase in foreign patient load, currently at 60% of pre-pandemic levels. It is expected to improve further as Singapore’s international borders were only reopened in May 22. Domestic patient load has also improved as more patients returned to perform delayed elective surgeries. We expect this
segment to recover steadily with the return of higher-billing foreign patients and a ramp up in elective surgeries in 2H22. It was noted that the Emergency Care Collaboration Scheme has been extended for another 4-5 years.
• China: Affected by zero-COVID policy. RFMD’s Chinese operations were impacted as several areas went through stringent lockdowns, with Raffles Hospital Shanghai being the most impacted. Hospital staff and patients were unable to commute to the hospital, affecting operations and patient load, leading to around S$5m EBITDA loss in 1H22 for Raffles Hospital Shanghai. However, Raffles Hospital Chongqing managed to come out relatively unscathed as patient load doubled in 1H22, posting about S$1.5m EBITDA loss
in 1H22 despite sporadic lockdowns. We maintain our previous EBITDA breakeven level timeline for Chongqing at end-2H22 while pushing back our timeline for Raffles Hospital Shanghai to early-1H25.
• We increase our 2022-24 earnings estimates, after factoring in higher revenue and margin assumptions for the healthcare services segment. For 2022-24, we increase our PATMI estimates from S$108.7m (S$72.5m previously), S$87.2m (S$67.3m previously) and S$75.4m (S$74.6m previously) respectively. We expect earnings to trend downwards starting 2023 as COVID-19 revenue tapers off.
• Upgrade to BUY with a higher PE-based target price of S$1.42 (previously S$1.34). We have changed our methodology from DCF to a PE valuation, pegged at -1.0SD (24.5x) of RFMD’s long-term average mean PE, due to uncertainty over RFMD’s Chinese operations. Due to expected record-high earnings in 2022, we have taken a conservative approach and pegged our PE multiple to -1.0SD instead of its mean to account for normalisation of earnings in 2023-24.
• Although Singapore’s government has been swift in its transition to endemic living, RFMD’s COVID-19 revenue has been resilient, backed by sporadic COVID-19 waves in 1H22. With an ongoing recovery in domestic operations, this would help support RFMD’s 2022-23 earnings and the tapering COVID-19 revenue, before hitting an inflection point in 2024-25 when RFMD’s Chinese hospitals start to exit their gestation periods. We still remain positive on RFMD’s medium-term China expansion and think that there is upside at current price levels.
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• Ramp-up of Chinese hospitals’ operations.
• Relaxation in China’s zero-COVID policy.
• Recovery in foreign patient load.