Healthcare sector

OCBC on 15 June 2012

Under our Healthcare sector coverage, both Raffles Medical Group (RMG) and Biosensors International Group (BIG) continued to deliver healthy revenue and earnings growth during the recent 1QCY12 results period, although the former’s PATMI was slightly below our expectations. We expect BIG to continue its growth trajectory moving forward, despite price cuts of drug-eluting stents in some countries which would dampen BIG’s gross margins. While competitive and wage pressures are on the rise for RMG, we expect the group to continue to benefit from thriving industry fundamentals and see room for RMG to raise its ASPs given its competitive pricing vis-à-vis its peers. Maintain OVERWEIGHT on the Healthcare sector, with BIG [BUY; FV: S$1.88] remaining as our preferred pick. We believe its recent share price sell down is overdone, and current valuations compare favourably against its peers. We also reiterate our BUY rating and S$2.58 fair value estimate on RMG.

1QCY12 results review
Under our Healthcare sector coverage for the recent 1QCY12 results period, Raffles Medical Group (RMG) reported PATMI which was slightly below our expectations, while Biosensors International Group’s (BIG) core earnings were in line with our estimates. Both companies continued to exhibit healthy growth trends for both topline and bottomline, while generating strong operating cashflows and maintaining a net cash position.

Positive developments taking place, although risks remain
We expect BIG to extend its market share gains as it continues to deliver strong clinical trial data which highlights the safety and efficacy of its drug-eluting stents (DES). Despite economic weakness emanating from the eurozone region, BIG still managed to achieve over 20% sales growth from the EMEA region, while Asia-Pacific was also another key area of growth for the group. Management believes that it is able to sustain its current growth trajectory in these regions moving forward. The biggest risk stems from price cuts of DES in some countries such as China, which would dampen BIG’s gross margins. On the other hand, RMG remains poised to benefit from the thriving healthcare scene in Singapore from both local patients and medical travellers. Although competitive and wage pressures are on the rise, we believe that RMG has room to raise its ASPs given its competitive pricing vis-à-vis its peers, while an increased depth of sub-specialties on offer would aid its revenue intensity increment.

Maintain OVERWEIGHT
We maintain our OVERWEIGHT rating on the Healthcare sector. YTD, the FTSE ST Health Care Index has declined 13.0% versus the STI’s 4.8% increase. This is due to the 21.7% fall in BIG’s share price YTD, which we believe forms a significant weight of the index. Nevertheless, BIG remains our preferred pick in the sector, with a BUY rating and S$1.88 fair value estimate. We believe that its sell down in recent weeks has been overdone. Despite the street’s 7.4% earnings cut for FY13F post its 4QFY12 results, the stock still trades at an attractive 11.5x FY13F consensus PER. This compares favourably with its peers’ average forward PER of 15.6x. We also reiterate our BUY rating and S$2.58 fair value estimate on RMG.