Amid a healthcare crunch, transitional care facilities (TCF) like that offered by Raffles Medical Group (RFMD) BSL -0.7% will benefit from their inclusion into Singapore&rsquo s healthcare ecosystem, say UOB Kay Hian (UOBKH) Research analysts Llelleythan Tan and John Cheong.

 

&ldquo With an ongoing demand-supply imbalance for public hospital beds, patients are being funnelled to private hospitals and step-down care facilities such as TCFs. As new additional public bed capacity would only be added from 2024 onwards, the Singapore government has indicated for longer term plans for TCFs to be included into the country&rsquo s healthcare system, benefitting private TCF operators such as RFMD,&rdquo write Tan and Cheong in a March 28 note.

 

The UOBKH analysts maintain &ldquo buy&rdquo on RFMD with a higher target price of $1.90 from $1.85 previously. The new target price represents a 32.7% upside against a last traded price of $1.43.

 

RFMD is a healthcare provider that operates medical clinics, imaging centres, and medical laboratories. It provides general and specialised medical, medical evacuation, medical advisory and dental treatment services.

 

Tan and Cheong point to a supply-demand imbalance. &ldquo During the Covid-19 XBB infection wave in 4Q2022, Singapore&rsquo s public hospitals faced a hospital bed crunch as both Covid-19 and non-Covid-19 patients swarmed public hospitals&rsquo emergency departments.&rdquo

 

According to the Ministry of Health (MOH), average wait times for emergency cases that required hospital admission increased from seven hours during 9M2022 to 50 hours in 4Q2022.

 

Public hospital bed occupancy had risen to 93.1% in 2022, from 87.6% pre-Covid-19, driven by longer stays and the Covid-19 pandemic.

 

The longer waiting times were largely due to a mismatch of demand and supply, write Tan and Cheong.

 

On the demand side, there was an ongoing structural increase in patients with the highest acuity driven by an ageing population. This was made worse by additional visits from Covid-19 patients during a Covid-19 infection wave.

 

On the supply side, additional beds from public healthcare facilities that were initially planned to open in 2022 were postponed due to Covid-19 related construction disruptions, which could have freed up hospital beds. Also, public hospitals had to set aside beds for Covid-19 patients, further straining capacity.

 

To free up hospital beds, MOH has implemented several initiatives. From 2024 onwards, more hospital beds would be added as public healthcare facilities like the Woodlands Health Campus and Tan Tock Seng Hospital Integrated Care Hub progressively open.

 

MOH is also working with private operators to accept emergency patients from public hospitals, benefiting private hospitals such as Raffles Hospital, which is under the Emergency Care Collaboration (ECC) programme.

 

Most importantly, patients are also being funnelled to step-down care facilities, such as the TCFs run by private operators.

 

There are currently five TCFs in operation, with one to be set up in the west near Ng Teng Fong General Hospital.

 

During a parliamentary debate on March 23, Singapore&rsquo s health minister mentioned that the TCFs would be retained and become &ldquo a medium or even long-term feature of our healthcare system&rdquo , note Tan and Cheong.

 

Singapore&rsquo s Covid-19 White Paper states: &ldquo In particular, Transitional Care Facilities have proven very useful during a pandemic crisis for relieving the burden on acute hospitals, and we will explore expanding them further.&rdquo

 

Currently operating one TCF in the east, RFMD is set to benefit from the Singapore government&rsquo s renewed focus on TCFs.

 

Favourable tailwinds

 

With tight public hospital bed capacity, RFMD&rsquo s domestic hospital is set to see robust patient loads as hospital patients are diverted to Raffles Hospital Singapore via the ECC programme.

 

Coupled with the return of foreign patients, domestic elective surgeries and the ramp-up of RFMD&rsquo s Chinese operations, UOBKH analysts expect FY2023 ending December segmental revenue from the hospital services to grow by 24.5% y-o-y.

 

TCFs are here to stay, note Tan and Cheong. &ldquo With this new development, we now expect the TCF to operate till June 2024 minimally, given that there is no additional bed capacity till 1H2024 as new public healthcare facilities progressively open.&rdquo

 

RFMD boasts &ldquo healthy margins due to its asset-light nature&rdquo , say Tan and Cheong.

 

TCFs contribute nearly 40% of RFMD&rsquo s FY2022 operating profit. This would help support RFMD&rsquo s profit for FY2023-FY2024, add the analysts.

 

As the TCF business model is confidential due to its partnership with MOH, UOBKH analysts have little guidance on its revenue and profitability. &ldquo However, we reckon that the TCF&rsquo s margins are healthy due to it being assetlight. We estimate that FY2022 Covid-19 revenue (TCF and vaccination centres) was around $240 million, of which a greater contribution of $180 million-$200 million was from the TCF as most vaccination centres were shut down/consolidated by 1H2022 due to a fully vaccinated population.&rdquo

 

Pre-pandemic (pre-2020), healthcare operating margins were constant at around 6%-8%, note Tan and Cheong. &ldquo Assuming the same margins for FY2022 non-Covid-19 services, we estimate that FY2022 Covid-19 services would have operating margins of 63.1%.&rdquo

 

RFMD had annual cost savings of $67 million y-o-y in FY2022. &ldquo With domestic inflationary pressures and a shortage of nurses in Singapore, we expect staff costs to inch back up to the historical average of 50%,&rdquo say Tan and Cheong.

 

Adding back $50 million of staff costs to FY2022, the analysts estimate normalised operating margins for the TCF to be 35%-40%. Based on this, RFMD&rsquo s TCF would have contributed around 35%-40% of the group&rsquo s overall FY2022 annual operating profit, add the analysts.

 

Taking a conservative view, UOBKH analysts have used -0.5 standard deviations to account for the possibility that the Singapore government reverses its policy and TCFs are made redundant. &ldquo However, the likely extension of TCFs has removed one of the very few short-term overhangs facing RFMD. Coupled with favourable tailwinds, we like RFMD for its cheap FY2023 P/E valuation (19.6x) compared to regional peers (35.8x).&rdquo

 

RHB Group Research analyst Shekhar Jaiswal is maintaining his &ldquo buy&rdquo call on Raffles Medical Group (RMG) BSL -0.7% at a target price of $1.70, following strong healthcare revenue in 2HFY2022 ended Dec 31, 2022, and the expected reopening of China.

 

In his note on March 24, Jaiswal noted that RMG&rsquo s transitional care facility (TCF) is subject to review by mid-year, but will likely continue to operate beyond June, translating to better-than-expected margins in 2023.

 

TCFs are short-term care facilities set up during the pandemic for Covid-19 patients that helps to free up beds in hospitals. The facilities are for medically stable patients from public hospitals waiting for long-term care arrangements. Raffles currently operates one at the Changi Expo.

 

&ldquo We remain positive on RMG&rsquo s long-term growth, which is dependent on its China operations generating profit,&rdquo he says. &ldquo Its forward P/E remains compelling versus regional peers.&rdquo

 

He notes that the group&rsquo s target price includes a 2% ESG premium, and implies a 26 times FY2023 P/E, which is lower than the regional peer average.

 

As Singapore&rsquo s public hospitals continue to run at almost full capacity, Jaiswal notes that TCFs will be retained as a key part of the healthcare system.

 

&ldquo Public hospital bed occupancy has risen from a pre-Covid-19 level of 87.6% in 2019 to 93.1% in 2022,&rdquo he says. &ldquo This is largely due to the higher number of older patients with complex conditions who require longer hospital stays.&rdquo

 

Jaiswal quotes Singapore&rsquo s Health Minister Ong Ye Kung, who said that the TCFs set up during the pandemic to prevent hospitals from being overwhelmed have proven so valuable that they will be retained as a key part of Singapore&rsquo s healthcare system.

 

On that account, he believes the group could continue operating its TCF beyond June.

 

Jaiswal also attributed his unchanged long-term investment thesis to higher than pre-Covid-19 patient load, a rise in elective surgeries and gradual return of foreign patient load, which should support near-term earnings.

 

He expects RMG&rsquo s China hospital business to resume operations gradually this year, and noted that despite being in its second year of operation, the ebitda losses were comparable to what it anticipated in its first year.

 

&ldquo RMG still expects its Shanghai hospital to break even (in terms of ebitda) in two to three years,&rdquo he says. &ldquo It has an $1 billion multi-currency medium-term note programme in addition to a $180 million net cash position, which will allow it to undertake an acquisition if a compelling opportunity arises.&rdquo

 

Separately, DBS Group Research acknowledges that the TCF development is positive for RMG as it will be a be a new source of income.

 

However, DBS, in its March 24 report, is keeping its " hold" call and $1.48 target price on the stock, as it maintains its view that RMG' s earnings growth will slow this current FY2023 from the " very high base" of the preceding FY2022.

 

DBS says key re-rating catalysts would include stronger visibility in the earnings trajectory from the TCF business a longer contract with the government locked in, and last but not least, more partnerships with the government.

 

Analysts at UOB Kay Hian, Maybank Securities and OCBC Investment Research (OIR) lift their target prices for Raffles Medical Group BSL 0.00%   (RMG) to $1.85, $1.65 and $1.60 respectively following the company&rsquo s FY2022 results announcement.

 

RMG announced record revenue and patmi at $766.5 million and $143.5 million respectively, forming 99% and 107.2% of UOBKH&rsquo s Llelleythan Tan Yi Rong&rsquo s full-year forecast. The analyst, who has maintained his &ldquo buy&rdquo call, expects revenue to soften in 2023 on the back of lower Covid-19 related revenue.

 

The company also recorded 61.4% y-o-y growth in operating profit, while operating margins expanded by 8.8 percentage points y-o-y. Tan expects operating margins to contract slightly in 2023, dragged by higher inflationary cost push and an ongoing shortage of healthcare workers in Singapore.

 

Maybank&rsquo s Eric Ong, who has a &ldquo buy&rdquo call on the stock, highlights that RMG&rsquo s ebitda jumped 50% y-o-y to $129.1 million. The significant margin expansion comes from positive operating leverage. While he thinks that the company&rsquo s FY2023-FY2025 margins may come off from elevated levels, it should be partly supported by continued growth in foreign parents as well as pent-up demand from higher-margin electives.

 

Meanwhile, DBS Group Research' s Rachel Tan expects RMG' s earnings growth to moderate in FY2023, given the exceptionally high base. This could cap the share price upward momentum in the near-term, she adds.

 

DBS has downgraded RMG to " hold" , with a lower target price of $1.48 from $1.64 previously.

 

Backed by a robust balance sheet with net cash of $180 million, RMG is open to explore new business opportunities such as potential mergers and acquisition in other markets to further complement its existing healthcare services, Ong points out.

 

As part of its longer term growth strategy, RMG aims to expand in the Chinese healthcare market, OIR analysts say. It now has two international tertiary hospitals in Beijing and Shanghai, in addition to Raffles Chongqing hospital which opened in January 2019.

 

The gestation period for the Raffles Shanghai hospital &mdash which opened on July 16, 2021 &mdash was previously expected to take about three years based on the Chongqing hospital experience. However, it could be delayed due to pandemic impact, the analysts add. OIR has kept its &ldquo hold&rdquo call on RMG.

 

Despite sporadic lockdowns in major cities, geographical revenue from China grew by 1.2% y-o-y in 2022. With the removal of China&rsquo s zero-Covid policy, hospital staff and patients are now able to commute freely, says Tan.

 

&ldquo Although ongoing Covid-19 waves have increased patient loads, it has created an unfavourable product mix which would likely compress margins. However, as Covid-19 eventually blows over in China, we are now more positive on the prospects of RMG&rsquo s Chinese hospitals and reckon that it would be its core revenue driver moving forward,&rdquo he adds.

 

UOBKH maintains its ebitda breakeven level timeline for Raffles Hospital Chongqing at 3QFY2023 and Raffles Hospital Shanghai at 4QFY2025 respectively.

 

Tan raises his FY2023 and FY2024 earnings forecasts, aside from adding his FY2025 earnings estimates on the back of higher hospital revenue assumptions. The analyst now expects 2023-2025 patmi of $129.4 million, $108 million, and $100.9 million respectively.

 

Meanwhile, Maybank&rsquo s Ong raises his FY2023-FY2024 EPS forecasts by 9%-12% on better margins assumption.

 

RAFFLES Medical Group : BSL +2.04% posted an 87.5 per cent rise in net profit for the second half of 2022, on better cost control and manpower deployment, along with lower inventories and consumables used.

 

Foreign patients also returned to Singapore to seek medical treatment during the period, as Covid-19 restrictions eased and borders reopened, the healthcare services provider said on Monday (Feb 27).

 

Net profit for the six months ended Dec 31, 2022, stood at S$83.8 million, compared with S$44.7 million posted in the same period a year ago. This translates to earnings per share (EPS) of S$0.0452, against an EPS of S$0.0239 in the year-ago period.

 

Revenue rose 1.1 per cent year on year to S$384.2 million, from S$380 million.

 

There was a 28.6 per cent reduction in staff costs to S$145.6 million, from S$204.1 million. Meanwhile, inventories and consumables used dropped 27.9 per cent to S$29.7 million, from S$41.2 million.

 

Raffles Medical reported a return of foreign patients seeking medical treatment in Singapore in the second half of 2022. Covid-19 activities relating to vaccination centres tapered off during the period, while some community treatment facilities evolved into step-down care facilities.

 

The board has proposed a final dividend of S$0.038 per share. In the same period a year ago, the board recommended a final dividend of S$0.018 per share and a special dividend of S$0.01 per share.

 

For the full year ended Dec 31, 2022, net profit rose 70.5 per cent to S$143.5 million, translating to an EPS of S$0.0773. Revenue was up 5.9 per cent to S$766.5 million.

 

Revenue from its healthcare division grew 8.6 per cent to S$498.3 million as patients returned to clinics, while its hospital services division reported lower revenue of S$313.3 million, due to a drop in polymerase chain reaction tests carried out in the fiscal year.

 

The group&rsquo s China operations continued to be impacted by the country&rsquo s zero-Covid-19 policy. Although all three of its hospitals continued operations during the lockdowns, Raffles China Healthcare&rsquo s hospital operations faced staffing constraints and interruption to patient access.

 

Raffles Medical&rsquo s directors expect the group to remain profitable in FY2023. The group expects its core healthcare business in Singapore to continue growing and expanding while its non-core Covid-19-related business phases out.

 

&ldquo With the relaxation of Covid-19 containment policies in China, Raffles China Healthcare will benefit from the lifting of travel restrictions. Local and expatriate patients can now return to seek treatment at our China hospitals and medical clinics,&rdquo Raffles Medical added.