1H22 results beat
- 1H22 PATMI increased 51.3% year-on-year (YoY).
- China business was impacted by the lockdowns in 2Q22, with a modest recovery outlook ahead amid a continued strict Covid-19 policy stance.
- Cautiously optimistic on the near term outlook of its China operations and return of foreign patients into Singapore.
- Fair value is lowered to SGD1.50
1H22 PATMI of SGD59.7m increased 51.3% YoY, beating expectations. 1H22 revenues grew 11.2% to SGD382.3m, while EBITDA was up 43.5% YoY to SGD107m. EBITDA margin expanded 6.7 percentage points (ppt) YoY to 28%, driven by higher operating leverage.
Key drivers for the solid set of results came from the healthcare services segment, which reported revenue growth of 24.1% YoY to SGD255.6m as more patients visited general practitioner and specialist clinics. The ongoing management of joint testing and vaccination centres and community treatment facilities also contributed to higher healthcare services revenues. On the other hand, hospital services division declined 11.4% YoY to SGD151.8m due to lower number of polymerase chain reaction (PCR) diagnostic tests were carried out in 1H22 as Covid-19 related activities tapered off with further economic re-opening.
1H22 revenue breakdown by regions – Singapore accounted for 91.5% of 1H22 consolidated revenues, which grew 11.4% YoY to SGD349.6m. Revenues from Greater China and Rest of Asia grew 5.2% and 21.7% YoY respectively to SGD24.7m and SGD7.9m respectively.
China hospitals (in particular Raffles Hospital Shanghai) were unsurprisingly impacted by the extended lockdowns in 2Q22, as the hospitals maintained operations but experienced staffing constraints and disruptions for patients who were unable to travel to its hospitals to seek medical treatment.
Approval to open an in-vitro fertilisation/assisted reproductive therapy centre at Le Cheng Hainan, China was received. Operations are expected to commence in 1Q23, which should complement its existing three hospitals offerings within its obstetrics and gynaecology practices for patients in China.
Balance sheet remains healthy as of 30 June 2022 in net cash position (~SGD288m in cash).
Overall, management provided a cautiously optimistic outlook. For Singapore, its Covid-19 related activities is likely to continue moderating, as reflected in the decline in PCR test volumes. Currently, the group operates two out of six vaccination centres in Singapore, versus 15 centres in July 2021. In China, the recovery outlook will hinge on the pace of economic normalisation, which has seen some hopeful signs such as a recovery in foreign patients and GP clinic visitations exceeding pandemic levels. The group is expected to remain profitable for the rest of this year, barring unforeseen worsening of the Covid-19 situation.
Fair value is lowered to SGD1.50 as we update our DCF model to reflect a higher bond yield assumption, and a more modest softer recovery outlook amid a continued strict Covid-19 management focus. We continue to expect moderating Covid-19 related revenue contribution domestically as re-opening momentum continues to underpin Singapore’s move towards an endemic state although this should be mitigated by a recovery of medical tourism into Singapore over the medium-term driven by improving
2021 sustainability highlights – Raffles Medical’s 2021 sustainability report released reiterated its holistic approach towards sustainability with updates shared on improvements made in its strategic areas. Sustainability achievements in 2021 include the group meeting its previous target to lower energy and water consumption by 10% and 5% respectively. Its goal of reducing energy consumption by 10% was achieved in a year as its total electrical energy consumption index fell from 186 kWh/GFA to 125 kWh/GFA.
Steady ESG rating over the past two years (higher than sector median rating), supported by the company’s steady management of key ESG parameters, particularly related to upholding positive employee relations (employment management initiatives such as skills development through Raffles Healthcare Institute) and maintaining strong quality management systems (accredited by the Joint Commission International since 2008). With its growing presence in China however, there is an observation by research that more comprehensive anti-corruption policies and compliance mechanisms may be required to mitigate increased business risks although it is noted that the company has not received any significant regulatory warnings over the past three years (as of February 2020). Limited data protection programs and policies has also been an area flagged out for potential improvement, given it handles sensitive patient information and is exposed to data security risks.
For healthcare providers such as Raffles Medical, Social and Governance pillars are more material segments contributing to its overall ESG rating (60% and 35% respectively), while the Environment pillar is assigned a more modest 5% weight by research. Raffles Medical scores well above industry average
for its delivery of Social aspects, but research has rated the firm below industry average scores for
Environment and Governance pillars due to observations such as: no evidence of compliance
audits; 100% of its revenues are exposed to more carbon intensive business lines and a relatively
weaker carbon intensity profile versus peers. BUY. (Research Team)