RAFFLES MEDICAL, OSIM: What analysts now say...

Excerpts from analyst reports

Standard Chartered maintains ‘Outperform’ call on Raffles Medical Group

Analyst: Alvin Witirto

Raffles Medical executive chairman, Dr Loo Choon Yong (left).
Company photo

Raffles Medical Group’s (RMG) 2QFY2014 results were slightly below our expectations, with net profit meeting 21% of our 2014 estimate. We believe this is attributable to weaker operating leverage from slower growth in the hospital services segment. We think revenue and earnings growth could still pick up in 2HFY2014, driven by stronger foreign patient volume.

Hospital services growth remained sluggish in 2QFY2014

Hospital services revenue increased by 4.9% year-on-year (YoY) in 2QFY2014, similar to the 1QFY2014 growth rate of 4.8% YoY and much weaker than 2Q13’s 16.8% YoY. Management said overall foreign patient volume was relatively flat YoY, with Indonesian patient volume remaining weak due to the Indonesian Rupiah depreciation and recent presidential elections.

Anecdotal observations indicate that Indonesian visitor volume has picked up in July. We think this could bode well for RMG’s Indonesian patient volume in 3QFY2014.

Robust growth in healthcare services

RMG’s healthcare services revenue increased by 15% YoY in 2QFY2014, compared to an average of 4-6% in 2013. Management attributed this to its Raffles Health Insurance business, which secured two large corporate contracts in 1HFY2014. In our view, this business could provide a longer-term margin upside for RMG, as more insurance clients seek care within the RMG network.

Reasonable valuation

RMG trades at 19x 2015E EV/EBITDA, and our price target implies 21x EV/EBITDA, offering a 13% potential upside. We believe RMG’s expansion plan in Singapore could drive long-term growth, and we continue to like its steady cash flow generation.

We use a blended average of EV/EBITDA and DCF valuation methodologies to arrive at our price target of S$4.47. While we prefer the discounted cash flow valuation methodology, given the stable cash flow of RMG’s hospital and healthcare services businesses, we recognise that investors may not be prepared to pay the full valuation for the company’s future cash flow. For our EV/EBITDA valuation, we conservatively use a multiple of 17 x 2015E (previously 15x), compared to the ASEAN peer average of 19x (previously 16x).


Related story:  RAFFLES MEDICAL: Dr CY Loo On Maintaining The Edge, And Other Matters

 Andy Wong

OSIM’s uDiva massage sofa is endorsed by popular Korean actor Lee Min Ho. Company photo

2Q14 results within our expectations

OSIM International Ltd (OSIM) reported 2QFY2014 results which came in within our expectations. Revenue rose 10.4% YoY to S$182.7m, while PATMI jumped by 13.1% to S$29.5m. This was driven by increased sales and profitability within existing outlets, as management continued its rationalisation strategy of closing down its non-performing stores.

According to OSIM, there was a disruptive impact caused by the World Cup. Management believes it may have been able to ‘squeeze out’ another 5%-10% of sales if not for this event. For 1H14, revenue and PATMI increased by 12.4% and 13.9% to S$355.3m and S$58.4m, forming 47.7% and 49.5% of our FY14 forecasts, respectively. OSIM also declared an interim DPS of 2 S cents, similar to 2Q13.

Product innovation to continue

OSIM’s uDiva massage sofa, which is endorsed by popular Korean actor Lee Min Ho, contributed well to its 2Q14 results. Management expects sales to remain robust for the rest of the year. OSIM also has a healthy pipeline of new products to be launched across its business segments. It plans to launch uBuddy, an office massage chair which will be priced at S$1.2k-1.3k. A new flagship massage chair is also targeted to be rolled-out next year. For TWG Tea, there are currently 33 outlets, and management has a target of reaching 45 outlets by year end. This aggressive expansion plan would incur initial start-up costs, but we are positive on its medium-to-long-term contribution to OSIM’s earnings.

Maintain BUY

We raise our FY14 and FY15 EPS both by 1%, to account for a smaller than-expected share base, as only 87.17% of OSIM’s previous convertible bonds (CBs) were converted into ordinary shares (we had assumed full conversion). Those CBs which were not converted had been redeemed by OSIM on 7 Jul 2014. As a result of our EPS forecast increase, our fair value estimate is also raised from S$3.18 to S$3.21.