Monday, 25 August 2014

Raffles Medical

Kim Eng on 25 Aug 2014

  • Maintain HOLD with slightly lower DCF-based TP of SGD3.93 (WACC 8%), from SGD3.94.
  • Competition from new private and public hospitals in next few years and the region for medical tourists.
  • Price gap with leading hospitals narrowed to less than 10%. Limited room for fee hikes.
Rising challenges
Raffles Medical could face rising competition from new private and public hospitals in the next few years, as well as competition from neighbouring countries for medical tourists. So far, it has done a good job in raising service quality. This has lifted the prices it can command for its procedures. As its prices now approach those of the top providers in the industry, room for further price hikes is limited, in our view. Maintain HOLD with DCF-based TP (WACC 8.1%, LTG 2%) slightly down to SGD3.93 from SGD3.94. We trim FY14E-16E EPS by 0.2-2% for a slight delay in new rental income.

More competition looming
Official data suggests many more private and public hospital beds could be rolled out in 2014-20, after the completion of the 220-bed Farrer Park Hospital this year, five new public hospitals and three integrated developments housing medical suites, apart from Connexion. Public hospitals could  increasingly become a threat, as higher government healthcare subsidies and rising costs of living prompt more Singaporeans to turn to public healthcare services.

Limited price upside
Management has always assured investors that it has room to raise prices, given Raffles Hospital’s  (RH) 20% price gap with the leading private hospitals. However, with its improving quality, that  price gap has narrowed to less than 10%, according to the latest data from the Ministry of Health. With this, its room for further fee hikes may be curtailed.

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