Monday 25 March 2013

Raffles Medical Group

OCBC on 25 Mar 2013

Raffles Medical Group (RMG) announced last Friday that its resubmission for the change of use of its commercial podium at 30 Bideford Road to a medical centre had been unsuccessful. This is the second setback faced by RMG in as many weeks as it had only recently lost out on a land tender for the development of a private hospital in Hong Kong. Management could now possibly seek to sell the property, retain it for rental purposes, or keep it for partial use and partial rental. Meanwhile, we expect RMG to continue to grow its Singapore business and to step up its negotiation efforts with regards to its recent non-binding Letter of Intent for a proposed integrated international hospital development in Shenzhen, China. Maintain HOLD on RMG, with an unchanged fair value estimate of S$3.01.

Resubmission for medical centre conversion unsuccessful
Raffles Medical Group (RMG) announced last Friday that its resubmission for the change of use of its commercial podium at 30 Bideford Road to a medical centre had been unsuccessful. We believe that concerns over traffic congestion in the area were the main impeding factor again. This is the second setback faced by RMG in as many weeks, as it had only recently lost out on a land tender for the development of a private hospital in Hong Kong to its competitor IHH Healthcare Berhad [NON-RATED]. We believe that management would explore the following options: 1) sell the property, 2) retain the podium as a commercial space and continue renting it out to supplement its income streams, or 3) open some clinics in the podium and rent out the remaining space. Given that the property is located at a prime location in the Orchard area, we do not foresee much difficulty should RMG decide to sell it. 

Concentrate on Singapore operations and China expansion
We now expect management to step up its negotiation efforts regarding its proposed collaboration with China Merchants Shekou Industrial Zone to develop an integrated international hospital in Shenzhen, China (recently entered into a non-binding Letter of Intent). This negotiation process would likely be completed within the next six months. Should both parties reach an agreement, it would provide an avenue for RMG to tap into the high-end healthcare market in the Pearl River Delta region. Total capex could amount to ~S$150m. Meanwhile, RMG would continue to grow its business in its core market, Singapore.

Reiterate our HOLD rating
We retain our estimates as we had not incorporated any contribution from RMG’s proposed new medical centre. Our PATMI forecasts for FY13 and FY14 are currently 3.3% and 8.0% below Bloomberg consensus average, respectively. Looking ahead, we foresee possible earnings cut by the street given this latest development. Maintain HOLD on RMG, with an unchanged fair value estimate of S$3.01, which is pegged to 27x FY13F EPS. The stock is currently trading at 30.2x FY13F EPS.

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