Thursday, 11 October 2012

Raffles Medical Group

OCBC on 10 Oct 2012

We expect the seasonally stronger 2H trend for Raffles Medical Group (RMG) to continue in FY12, despite rising staff costs. This is supported by expected traction gains in its patient loads and leeway to raise its charges. We also believe that the commencement of operations at RMG’s new Specialist Centre in 1H13 would help boost its net margin from 17.3% in FY12F to 17.7% in FY13F. While we are retaining our forecasts, we roll forward our valuations on RMG to 24x FY13F EPS. This correspondingly bumps up our fair value estimate from S$2.63 to S$2.82. We upgrade RMG from Hold to BUY given potential total returns of 15.8%. Current valuations also appear favourable vis-à-vis its direct comparable peers, while the continued macroeconomic uncertainties would also provide an investment merit for defensive counters such as RMG.
Expect stronger 2H12 and FY13
We expect the seasonally stronger 2H trend for Raffles Medical Group (RMG) to continue in FY12, despite rising staff costs. This is supported by expected traction gains in its patient loads and room to raise charges, albeit on a gradual basis, given its competitive pricing vis-à-vis its major peers. We forecast RMG’s 2H12 revenue and core earnings to increase 8.2% and 24.0% HoH to S$162.1m and S$29.8m, respectively. This also translates into a growth of 14.6% and 14.1% YoY, respectively. For FY13, we believe that the commencement of operations at its new Specialist Centre in 1H13 would help boost RMG’s net margin from 17.3% in FY12F to 17.7% in FY13F. This would be driven by improved economies of scale, increased referrals to its Raffles Hospital and better utilisation of manpower which were hired in preparation for its enlarged operations. 

Favourable valuations vis-à-vis major peers
Based on forward PER valuations, RMG currently ranks as the second cheapest stock amongst its direct comparable peers from Singapore, Malaysia, India and Thailand (Exhibit 3), despite delivering the second highest estimated net margin, according to Bloomberg consensus data. We further conduct our analysis on the PER trends of RMG and its peers set, and note that the ratio of RMG’s PER relative to its peers’ average is currently at a 13.5% discount to their 5-year average. 

Roll forward our valuations and upgrade to BUY
Since we downgraded RMG to ‘Hold’ on 24 Jul 2012, its share price has trended 4.3% downwards, underperforming the STI by 7.1%. While we are retaining our forecasts, we roll forward our valuations on RMG to 24x FY13F EPS. This correspondingly bumps up our fair value estimate from S$2.63 to S$2.82. Coupled with a dividend yield of 1.6% (FY13F), we upgrade RMG from Hold to BUY given potential total returns of 15.8%. Our upgrade is also reinforced by continued uncertainty over the macroeconomic backdrop, which we believe would provide an investment merit for defensive counters which also generate strong operating cashflows, such as RMG.

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