raffles medical group ltd target price: 4.44 sgd (+3.2% ... · singapore offering a range of...
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Raffles Medical Group Ltd
Target Price: 4.44 SGD (+3.2%) Recommendation: HOLD
23rd September 2015
Last Closed Price: 4.30 SGD 12M Target: 4.44 SGD Spearheading Growth Beyond Singapore
Stable Financials As the saying goes: “cash is king”. RMG has kept its finances as healthy as their patients. As of now it has maintained a net cash and cash equivalent value of above SGD 100 million on its balance sheet for 4 consecutive years. It has negligible level of debt and no long term obligations. This enables RMG to exercise greater financial leverage should the need arises during its expansion. Strong Core Businesses & Good Branding Carrying the Raffles brand, the implied message is that “we offer only the best”. As a trusted brand, it has a huge network of clinics, hospitals and specialist units. The rooms within Raffles Hospital are outfitted to the standards of five star hotels. Such quality of service attracts medical tourists who flock to RMG for ease and convenience. As RMG is set to expand overseas, we have confidence that the brand effect will carry over and generate more profits. With a load of experience and talented staff, RMG is able to establish core competency as an integrated healthcare provider that is almost unrivalled regionally. The extent of services provided and economies of scale will translate to sustainable profit margins in the long run. Potential Catalysts through Acquisitions & Collaboration Shanghai RMG has entered into framework agreement with Shanghai Binjiang International Tourism Development Co. Ltd to collaborate on the proposed development of an integrated international hospital in the central business zone of Qiantan, Pudong NewDistrict in Shanghai, China. RMG is also negotiating on a proposed collaboration with China Merchants Shekou Industrial Zone to develop an integrated international hospital in Shenzhen, China. We expect private hospital volume to increase, driven by government initiatives and rising affluence. Healthcare business is less likely to be impacted by weakness in Chinese demand. Competitive advantage in B2B Segment As the leader in corporate segment, and has grown consistently over the years. We expect Raffles medical to secure first mover advantage in China over foreign competitors to ink contracts with government and companies. Valuation Discounted cash flow valuation is used to value RMG. Given the stable cash flow and asset level, Pro Forma statement was projected and cash flow is discounted back to present valuing for the subsequent years. Lastly, by adding its terminal value, we will get a total PV Enterprise value of SGD 2374 million which gives a share price of SGD 4.44; representing a 3.2.% upside.
Upside Potential: 3.2% GICS Sector: Healthcare GICS Sub-Industry: Healthcare Service Provider
SGX Ticker SGX:R01 1Y Price v. Relative Index
Company Description Raffles Medical group is Singapore’s largest private healthcare provider, offering integrated healthcare services. The company runs a hospital and a network of clinics with family physicians, specialists and dental surgeons.
Key Financials Market Capitalization (mil) 2670 SGD Shares Outstanding (mil) 573.4 A.D. Value Traded (SGD) 419167 Dividend Yield (%) 1.26% 52-Wk High 4.99 SGD 52-Wk Low 3.75 SGD P/E (ttm) 38.29
(USD mil) FY12A FY13A FY14A FY15E P/E (x) 31.11 26.80 0.88 - P/B (x) 0.00 3.65 4.03 - ROE (%) 16.17% 19.44% 13.10% - Div Yield (%) 0.88% 0.99% 1.80 - Net D/E 0.05 0.01 0.01 - EBITDA (mil) 75 104 91 - P/E (x) 31.11 26.80 0.88 - Key Executives Executive Chairman Loo Choon Yong Lead Independent Director Koh Poh Tiong Research Analyst: Michell [email protected] Shu Nan [email protected] Preston [email protected] Han Song [email protected]
Figure 1. Revenue by Division
Company Overview
Raffles Medical Group Ltd operates as an integrated private healthcare provider in Singapore and the region. The company operates through three segments: Healthcare Services, Hospital Services, and Investment Holdings. It owns and operates a network of family medicine clinics, a tertiary care private hospital, dental clinics, and a healthcare insurance business. The company also operates a clinic network in Hong Kong and a medical center in Shanghai. Its flagship hospital is Raffles Hospital, a private tertiary hospital located in Singapore offering a range of specialist medical and diagnostic services for both inpatients and outpatients. The company was founded in 1976 and is based in Singapore.
The Group’s flagship, Raffles Hospital, is a tertiary hospital. Located in the heart of Singapore, Raffles Hospital offers a full complement of specialist services combined with advanced medical technology. Its 21 specialist centers meet a wide variety of medical needs such as obstetrics and gynecology, cardiology, oncology and orthopedics. As an extension of its healthcare services, the Group offers health financing under its subsidiary Raffles Health Insurance (RHI). The Group’s healthcare insurance specialist writes health insurance policies for both corporate groups and individuals. RHI is able to leverage on RMG's healthcare network to provide a seamless and superior service, where the health insurer and the healthcare provider are two halves of one integrated unit. Raffles Health, the Group’s consumer healthcare division, develops and distributes a full range of nutraceuticals, supplements, vitamins and medical diagnostic equipment for personal healthcare in Singapore and in the regional markets. Raffles Medical Group subscribes to the Institutional Group Practice Model, a mode of practice adopted by internationally renowned US medical institutions such as the Mayo Clinic. Through this model, specialists work as a team to provide patients the quality assurance of medical services that are integrated, peer reviewed and medically audited. Revenue Breakdown Raffles Medical Group derives a large part of its revenue from its main business on hospital services. Based on Figure 1, 84% of its revenue comes from hospital services while its healthcare business accounts for a mere 11% of its revenue.
Source: Company Data Figure 2: EPS
Source: Company Data Figure 3: Annual ROE
Source: Company Data
Figure 4: Healthcare efficiency findings
Source: Bloomberg Figure 5: Population trend
Source: SG government population whitepaper
Industry Analysis & Growth Drivers
RMG started off with just 2 clinics in 1976. Now however, RMG has grown it’s operations to serve over 1 million patients and more than 6500 corporate clients today. Some of the factors that contribute to the growth of RMG are as follows: growing medical tourism, rising affluence in the region and ageing population along with longer life expectancy.
Increasing Medical Tourism
Tourism is one of the largest and fastest growing industries of Singapore. More than 10.2 million tourists visit Singapore every year. The Government is promoting Singapore as the world’s best medical tourism hub. A survey conducted in the year 2014 has shown that more than 200,000 international citizens visit Singapore every year to receive medical care and avail medical services from the hospitals and clinics of the country. An estimate has projected that more than one million tourists will visit Singapore by the end of 2015 only to enjoy the medical facilities of the country. The total earnings of the Singapore government from medical tourism by the end of the current year is projected at 3 billion USD.
Singapore was ranked 1st in Asia according to Bloomberg’s “Most Efficient Health Care list of 2014.”, which measures the overall efficiency of a country which considers life expectancies, Health-care cost as a percentage of GDP and other relevant factors.
Medical tourism is a major contributor to RMG’s growth in the hospital services segment. More than 35% of Raffles Hospital’s patients are foreigners from over 100 countries. To support the growing foreign patient segment and provide assistance relating to travel documents and medical bookings, RMG has set up patient liaison offices in a few countries including, Indonesia, Vietnam, Cambodia and even Russia.
Rising affluence
Rising affluence in Singapore and neighbouring countries in the region leads to an increase in the willingness of people to spend on private healthcare such as Raffles Medical Group.
The GNI in Singapore has risen in the past 5 years, it was $37 080 and it rose to $55 150 (USD) in 2014. This shows that individuals income have been increasing steadily and they are now able to afford private healthcare.
This table shows the private health expenditure as a percentage of total GDP in Singapore over the last 10 years. The percentage has steadily increased since 2006. Coupled with the ageing population and longer life expectancy, consumption in private healthcare is expected to continue growing. Ageing population and longer life expectancy
With an ageing population and longer life expectancy in Singapore, healthcare needs would increase, along with long-term care expenditure for the elderly. Residents aged 65 and above accounted for 11.05% of Singapore’s resident population as of mid-2014. Resident ratio declined to 6.0 in 2014 and is expected to fall further as the population continues to age. Singaporeans are also living longer, leading to a higher demand for healthcare services for the elderly.
This table shows the residents aged 65 and above as a percentage of total population. It has been rising steadily since 2006 and is expected to continue rising. The growing number of elderly will reflect by causing demand for healthcare to increase.
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Figure 6: SWOT
Strength Weakness
- Wide range of medical specialties - Extensive network of private clinics - Diversified corporate client and foreign patients base
- Turnover over for GPs are higher -Unsustainable future revenue growth rate
Opportunities Threats
- Growth in regional healthcare demand - Expansion of hospitals allows the addition of new specialists and medical discipline
- Competition from public healthcare - Change in government policy
Porter’s Five Forces
High barriers of entry (BOE) Highly regulated industry
High initial capital investment
Economies of scale enjoyed by sizeable institutions
Difficulty in attracting medical professionals without a brand name
High threat of substitutes (TOS)
Popular subsidized public healthcare among the locals
Foreign patients have cheaper alternatives in other countries (E.g.
India/Thailand)
Low bargaining power of customers (BPC) Demand of high-end healthcare is always inelastic
Low bargaining power of suppliers (BPS)
Positive working capital due to 90-day credit policy
Economies of scales in medical supply orders
Low intensity of rivalry (ICR)
Competition by reputation and quality of service
Dominance in high end market
Intensive rivalry in the healthcare industry
SWOT analysis
Strengths The defensive and cash generative nature of RMG's business has seen it perform decently even during the financial meltdown. This is due to management's efforts to properly manage its costs and diversify its client base, especially for foreign patients. There is also sustained endeavours to widen the range of medical specialties and hence provide added value to patients Weakness General practitioner (GP) services are more commoditized and the turnover of GPs are higher. This has resulted in more volatile profit margins for healthcare services. However healthcare services comprises about 41% of revenue, less than the more lucrative hospital services. In addition, other operating expenses as a percentage of Revenue, which include marketing activities, are declining over the years. While such reduction enhances net profit margin, it does not indicate that the revenue growth rate in the future would be sustainable. Opportunities Asian economies have been leading the global economic recovery. While this is positive for RMG, given the importance of medical travellers for continued growth, we believe that setting up more overseas operations will be the next growth driver. This allows RMG to capture market share for locals in these markets who prefer not to travel overseas for treatment. The availability of complex medical procedures, which might not be readily available in these local markets, will help to attract people from the middle and upper-middle income groups. Together with a strong Raffles branding, this will allow RMG to diversify from its Singapore operations. In addition, healthcare demand are correlated to population size, life expectancy and purchasing power. On all these counts, the potential growth in regional demand for healthcare services is promising. Asia’s population will expand from 3.2 billion in 2002 to 5.6
Figure 7: Net cash position
Source: Company, PSR
billion in 2050. In line with this trend, consumer expenditure on healthcare services and healthcare goods is expected to double from US$90 billion in 1999 to US$188 billion in 2013. Threats The onset of another economic slowdown would result in the postponement of certain non-critical medical procedures as well as a reduction in expatriate population. This would lower demand for private healthcare. Foreign patients, whom accounts for half of its revenue, are the lifeblood of RMG, but this important revenue source is at risk of dying up afte the Singapore Tourism Board cut its estimated visitor’s arrival got 2015. The STB estimates that Singapore will welcome ~ 15m tourists expects ~S$24Bn in tourism receipts, compared to their earlier target of ~17m and S$30Bn in tourism receipts.
Rising competition locally
With more hospitals being built (Jurong East) as well as expansion by other
smaller competing medical groups locally, market share of RMG faces threat of
being reduced.
Financial Analysis
Operating Segments
RMG reports its revenue and profits in 3 segments: 1) Healthcare Services, 2)
Hospital Services and 3) Investment holdings. A simple clear structure of reliable
earnings make RMG very attractive as a defensive stock. It has high cash
generating abilities and is not reliant on volatile revenue generating assets.
Healthcare services
Comprises operations of medical clinics and other general medical services,
provision of health insurance, trading in pharmaceutical and nutraceutical
products and diagnostic equipment, and provision of management and
consultancy services. We expect RMG to make use of its expertise in integrated
healthcare solutions to open up markets overseas, especially in China where
Singapore companies are highly sought after for quality assured services.
Hospital services
Provision of specialised medical services and operation of hospital and business of
medical laboratory and imaging centre.
Investment holdings
Relate to shop units within its commercial property, Raffles Hospital building and
units of commercial space within Samsung Hub that are leased to external
customers. RMG had disposed of its wholly-owned subsidiary that owned Thong
Sia building in 31 Oct 2013. Purchase of land for expansion of Raffles hospital as
well as acquisition of property at Holland Village will boost its holdings
significantly.
Revenue Growth
RMG’s revenue achieved strong top line growth historically, with group revenue
growing at 11.2% CAGR from FY09-FY13 (3Y CAGR: 12.6%). Healthcare services
and hospital services account for 63% and 34% of FY13 revenue respectively, and
contribute to strong group revenue growth. An increase in high net worth
patients due to overseas expansion is likely to see its top line grow at a
sustainable level.
Investment Thesis
RMG entered into an agreement with MOH Raffles Medical Group Ltd entered into an agreement with the Ministry of Health Singapore (MOH) to collaborate on a 2-year project whereby Raffles Hospital’s Emergency Department (ED) will receive patients transported to it by Singapore Civil Defence Force emergency ambulances during office hours. Raffles Hospital will provide emergency care for these patients at its ED, and follow up inpatient care and/or outpatient care at its specialist clinics, as medically indicated, in relation to the patient’s presenting diagnosis at the ED. Patients treated in Raffles Hospital under this collaboration will be eligible for Government subsidy. Says the project is expected to be implemented around the middle of 2015, allowing time for preparation and commissioning of facilities and systems. This would definitely boost RMG”S competitive standing as well as profits. This is because the government subsidy included would cause more patients to view RMG as a government subsidised hospital and more patients would be expected to go to RMG thereby boosting it’s profits. RMG China Expansion Plans RFMD announced its collaboration with Shanghai Lujiazui to build a 300-bed hospital in Pudong, the bustling financial district in Shanghai, teeming with wealthy expats and a local population of more than 5 million. Raffles Medical has also agreed to work with China Merchant Group for a similar 200-bed hospital venture in Shenzhen, one of the country’s most successful Special Economic Zones situated just north of Hong Kong. Raffles Medical has seen double-digit growth in recent years by successfully riding on the booming private hospital trend in Singapore, but it could expand even faster if it manages to nab a slice of China’s lucrative private healthcare market. The fast increase in private healthcare spending can be attributed to China’s greying population. As of 2011, 9.1% of the country or 123 million Chinese is aged 65 and above and require more intensive healthcare services – or 50 million more elderly Chinese than in 1995. More are expected to join China’s old age cohort as life expectancy in China has increased by roughly 6 years in just two decades, from 68.6 years old in 1990 to 74.8 years old in 2010. Untapped Debt Capacity grants greater financial leverage
RMG currently has negligible level of corporate debt and no long term obligations. This enables RMG to exercise greater financial leverage should the need arises during its expansion. We expect RMG to take up some form od debt financing in the near future in order to acquire more assets overseas. In 2014, Raffles medical expended large amount of its cash position to acquire PPE as well as a deal to acquire a plot of land from Singapore Land Authority for $105.2 million to undergo expansion of Raffles hospital.
Valuation
Figure 8: Operating CF and FCF
Source: S&P Capital IQ Figure 9: Assumptions
Source: Based on own estimates Figure 10: Terminal Value
Source: Based on own estimates
For the valuation of Raffles Medical, we conducted a discounted cash flow (DCF) analysis due to stability of cash flows for medical companies, achieving continues growth in net operating cash flow for the past 5 years. Profit margins of the company have also been consistent at 18% to 20% for recent years, which makes DCF the method of best fit. Relative valuations in this case does not work well due to the lack of similar size firms in the STI. The lack of debt also makes it one-of-a-kind. SOTP valuation suffers the similar issue of lack of appropriate comparable firms, at the same time, recent acquisition of subsidiaries makes it even harder to value individual business components. By first projecting the Pro Forma financial statements, we value the business by discounting its future cash flows back to its present value. Figure 7 shows the assumptions made for discounting the cash flows back to present value. As an established company, Raffles medical has relatively stable assets and cash flows. Using inputs from Pro Forma statements, we derive the FCFF value before discounting each year’s cash flow back based on discount period and discount rate. This is based on the risk free rate of 2.4%, beta of 0.80 (given the nature of the medical industry) and market risk premium of 7%. Through that we get a WACC of 8.0%. RMG has been actively acquiring assets overseas, in an attempt to diversify outside of Singapore, in search of markets with higher growth rates. This inevitably led to increase in acquisition expenditure which increased its capital expenditure as well as cash position. However in the long run we believe that the company is in a healthy financial position. Moreover, RMG no debt which means it has a significant untapped debt capacity. This will further add on to the growth and financial strength to acquire overseas assets. Due to the nature of the healthcare industry being less prone to cyclical pressures of the market, we did not perform a bear-bull case analysis. RMG has been one of the rare companies that has a track record of consistent profitability, with recent development, we do not foresee any catalyst for deviation from the current growth track.
Figure 11: Average spending per patient per day in local hospitals
Source: MOH
Key Investment Risks Competition from public health care services Singaporeans who contribute to 94% of healthcare expenditure prefer public health care services because of the subsidies that come with it. The figure beside shows the difference between the average patients spend in a private hospital and public hospital in a day. Private hospitals could cost up to 5 times as much as the public hospitals. The data was obtained from MOH. And the figures were calculated by taking total spending during the course of stay divided by the number of days, thereby arriving at the average spent a day at the hospital. Seeing as Singaporean patients could get the same or similar treatments at a much cheaper price, they would not prefer to spend it on private healthcare which is so much more expensive. This is one of the biggest challenges for a private healthcare firm such as RMG
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