KUALA LUMPUR, April 8 ― Raffles Medical is expanding aggressively. With no debt on the balance sheet, it has plenty of headroom. But rates are set to rise next year.

Brokers are bullish on Raffles Medical due to growth prospects from expansion in Singapore and possibly in China.

Maybank Research has reiterated its BUY call with a consensus-topping target price of S$4.11 (RM10.67).

The stock is the analyst's top pick in the Singapore healthcare sector.

CIMB Research has maintained its ADD rating and OCBC Research a BUY rating.

Both brokers have a target price of S$3.68.

Raffles Medical is optimistic about FY14, thanks to additional growth from expansion of medical centres at the Whitesands Shopping Centre, Bedok Mall and Jurong Point.

In the long run, growth will come from expansion in business, after Raffles Hospital is extended to its newly purchased land site.

In addition, it also completed the purchase of a 3-storey office building at Holland Village from DBS Bank Ltd in January, which will be redeveloped into a 5-storey commercial building consisting of medical clinics, retail shops, restaurants and car park.

Both projects will be completed in 2016.

The company just announced earnings for FY14:

Revenue: +9.4 per cent to S$341 million

Profit: +49.3 per cent to S$84.9 million

One-off gains/losses: S$20.4 million vs Nil

Cash flow from operations: S$71.2 milion vs S$69.6 million

Dividend: 5 cents per share vs 4.5 cents per share

Hospital Services registered revenue growth of 12.4 per cent to S$231.3 million, and Healthcare Services at 6.2 per cent to S$124.5 million.

The growth in revenue was due to more specialists joining the hospital, more patients treated, and higher number of patients needed more care.

It was also due to increased contributions from overseas operations and the provision of more healthcare insurance services.

Profit was boosted by S$3.9 million of fair value gains in investment properties, and a S$20.4 million gain from the sale of Thong Sia building.

1. Can it finance growth comfortably as interest rates rise?

Group's expected cash outflow in two years is about S$535 million.

This includes the cost of the Holland Village property for S$54.8 million, and redevelopment cost of about S$65 million.

The other investment is related to the purchase of the site adjacent to the hospital for S$105.2 million and the cost of construction of about S$310 million.

This outflow is close to its total assets of S$573.4 million as at FY13.

This shows that the company is on track to have a billion dollars' worth of assets.

But with a cash balance of just S$266 million for the cost of development, dividend payment and the need for working capital, it looks like it will have to borrow money to pay for it all.

The company currently has no debt.

2. Will Dr Loo Choon Yong dilute his stake?

Dr Loo Choon Yong has a direct interest of about 10 per cent in Raffles Medical, and deemed interest of 42.3 per cent.

Is he prepared to dilute his stake in a cash call?

Or is the company purely focused on raising debt, so that his stake is not diluted?

3. Which property will it mortgage if it raises debt?

Or will it sell investment properties valued at S$100 million?

4. How is the discussion with the joint venture partners in China coming along?

Discussions to establish hospitals with Shanghai Lujiazui and China Merchant Group started in September 2013.

But we have no update since then.

Maybank Research highlights that the group hopes to build a bigger business in China than in Singapore.

5. How quickly can it break even on its property at Holland Village?

The group purchased a 3-storey office building at Holland Village from DBS Bank on January 14, 2014.

It will redevelop the property into a 5-storey commercial building comprising five above-ground levels, one basement level, and two basement car park levels.

Once redeveloped the building will have a Gross Floor Area of 62,720 square feet.

The company will lease about 9,000 square feet of space on the first and fifth levels for use as outpatient medical and specialist clinics.

Additionally, DBS Bank will lease 4,500 square feet of space on the first and second levels for its banking operations.

Raffles Medical will lease out the remaining leasable area to retail shops and food and beverage outlets.

6. What is the targeted total rental receipts from the property?

7. How much will it spend on advanced technology?

The group highlighted that it will invest in advanced technologies to maintain its position as a premier private hospital delivering high quality healthcare.

It added about S$3.3 million of medical equipment according to the FY12 annual report.

8. When will it hire a new CFO?

Lui Chong Chee resigned from his post in February, officially to pursue other opportunities and personal interests.

He joined the group three years earlier in January 2011.

In the absence of a new CFO, the company secretary, Mrs Kimmy Goh, is covering his duties.

9. Can revenue grow faster than costs?

Staff cost has remained at 50 per cent of revenue for the past three years.

Its expansion plans in Singapore may increase cost at a faster rate than revenue because it is hiring more staff.

10. How much is it affected by the labour shortage?

Good to know they're hiring, but are they able to find enough local candidates?

For those positions they can't fill locally, how successful are they in securing work permits from medical staff from abroad?

11. Can it maintain its growth in return on equity?

Return on equity (ROE), calculated as net income divided by shareholder's equity, has increased from 15.1 per cent in FY11, to 14.7 per cent in FY12 and 17.9 per cent in FY13.

In fact, it has been consistently rising since FY08.

12. How much would the 2014 budget initiative for healthcare add to the bottom line?

The recent 2014 Budget initiatives announced by the Government reflects strong demand for healthcare.

DMG OSK research says measures like more citizens qualifying for the community health assist scheme (CHAS) will see some spillover to the private sector.

Patient volume at general practitioner (GP) clinics are likely to increase, and additional Medisave top-ups and increased flexibility in the use of Medisave may motivate well-to-do Singaporeans to seek treatment at private healthcare providers.

With a wide network of GP clinics across the island, the group stands to benefit from this.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message). ― Investor Central

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