Normalisation of profitability in 2H23
- 2H23 net profit of S$30.3m brought FY23 net profit to S$90.2m, in line at 104.4%/101.3% of our/Bloomberg consensus’ estimates.
- EBITDA margins have normalised towards pre-Covid (i.e. FY19) levels, as treatment of Covid-19 becomes part of business-as-usual clinical practice.
- Lower TP to S$1.16, pegged at 13x FY25F EV/EBITDA (5-year mean) as RFMD. Maintain Add on strong net cash position to position for growth.
Decline in profitability of healthcare services in 2H23…
With most of its remaining Covid-19-related project revenue (i.e. management of Covid-19 facility) tapering off in 1H23, RFMD saw its healthcare services revenue decline 45.6% yoy/32.6% hoh in 2H23. EBITDA margins also declined 34.7% pts yoy/26.8% pts hoh to 15.2% in 2H23, which we think is a normalised margin level for the segment compared to pre-Covid-19 levels of 5.8%-11.8% in FY17-19, as the segment had previously included its lower margin insurance services segment. Since 1H23, RFMD has disclosed its insurance services segment separately with the adoption of SFRS(I) 17 for insurance contracts. The normalised EBITDA margins also suggest that the EBITDA and margin contribution from RFMD’s management of the Transitional Care Facility (TCF) in Singapore Expo (Covid-19 facility previously) is likely to have declined, in our view.
…accompanied with margins recovery for its hospital services
On the other hand, RFMD’s hospital services segment saw EBITDA margin expand to 20.1% in 2H23 from 9.8% in 1H23. Given the slower pick up in revenue from China (+6.3% hoh) where RFMD has been operating two gestating hospitals (Shanghai and Chongqing), we think that the margin improvement suggests better contribution from its Singapore hospital operations. The segment, which had included contribution from Covid-19 lab tests, had observed depressed EBITDA margins of 8.1%-15.9% since 2H21 after Singapore moved away from extensive Covid-19 testing, as well as nursing additional gestational losses arising from the opening of its Shanghai hospital in FY22.
Reiterate Add; well-positioned for overseas expansion
We adjust our FY24F/25F EPS downwards by 0.6%/2.4% to take into account margin compression from higher insurance services expenses despite higher revenue estimates. We maintain our Add call as we think RFMD’s net cash position (ex. lease liabilities) of S$272.9m in FY23 (up from S$180.1m in FY22), allows RFMD to explore both greenfield and brownfield expansion overseas, given limited opportunities for organic growth in Singapore. RFMD has also maintained its guidance to pay out up to 50% of its profit as dividend to balance between growth and returns to shareholders. Re-rating catalysts: a stronger revenue momentum in China that will accelerate turnaround of its gestating hospitals, and lower loss ratio from its insurance business. Downside risks include prolonged losses from gestating hospitals in China and a lower-than-expected patient load at its Singapore hospital.
