Wednesday, 30 July 2014

Raffles Medical Group

OCBC on 30 Jul 2014
  • Key negative: The lucrative hospital services posted its second consecutive quarter of slow YoY growth.
  • No clarity over expansion plans in China, while a new rival in Singapore is emerging.
  • HOLD with unchanged DCF-derived TP of SGD3.94.
Key negative: Slowdown in hospital services
While 2Q14 earnings were within our expectation, they fell short of consensus estimates. The continued slowdown in its more profitable hospital services segment (63.5% of FY13 revenue) is a concern. Hospital services, which command lucrative PBT margins of 26% vs 9% for healthcare services, grew a mere 5% YoY in 2Q14, its second consecutive quarter of single-digit growth. Managementattributed this to fewer visits by Indonesian patients, owing to a depreciating IDR vs SGD and the presidential election.China expansion plans remain murky; no catalyst Management remains committed to China and reiterates that  regulatory approvals have been impeding progress. It would still  take at least three years to commence operations even after the  approvals are obtained.

Confronting new rival in Singapore
Raffles Medical’s local redevelopment and expansion plans are on track for completion in 2016. Management does not think that the opening of a new private hospital in Farrer Park will pose a threat, given that the latter operates on a different business model. In our  view, this new potential competitor still bears monitoring. In the  absence of an external earnings driver, Singapore has to provide all  the growth.

Reiterate HOLD with DCF-derived TP of SGD3.94
Trading at 33x FY14E P/E against a projected three-year EPS CAGR of 12.3%, valuations look fair. However, we like its resilient  earnings, backed by its corporate and foreign patient business and government initiatives.

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