Raffles Medical Group

Kim Eng on 26 June 2012

Cheapest hospital stock now, upgrade to BUY. The 11% dip in share price from its February high of SGD2.44 has resulted in Raffles Medical Group (RMG) emerging as the cheapest hospital stock in the region. We believe that the defensive nature of its hospital earnings is a strong attribute in an uncertain market. We upgrade our recommendation from HOLD to BUY, given its widening valuation discount relative to peers. Our DCF-based target price is lowered marginally to SGD2.71 after some minor adjustments.

Premium valuations intact. Despite the recent sell-off in equity markets, hospital stocks have managed to hold on to their premium valuations, trading at above-market average PERs of about 26x. Aside from defensive earnings, anticipation of renewed interest in the healthcare sector could have provided stock support, in the hope of a positive re-rating in valuations for the sector.

No competition from Novena suites. Parkway Pantai’s 333-bed Mount Elizabeth Novena Hospital is expected to open next month with 180 beds operating initially and the rest to come on-stream by the end of the year. Though this marks one of the biggest increases in private hospital beds in more than 10 years, we do not expect any major negative impact on RMG as the new hospital targets the high-end segment of the market.

Cost containment manageable. RMG’s greatest challenge lies in managing staff cost, which is estimated at 48% of its total revenue. The Singapore government intends to increase healthcare professionals’ wages by an average of 20% by 2014. RMG would need to respond correspondingly with a competitive compensation structure to retain and attract staff. Nevertheless, we note that it still has room to raise its charges and intends to do so, given that its average surgical cost is lower than that of Singapore General Hospital, a public hospital.

Strongest balance sheet. RMG has the strongest balance sheet among its peers, being the only one in a net cash position. Even after accounting for capex for its expansion plans, we expect it to remain in a net cash position, helped by its strong operating cash flow generating capability. Upgrade to BUY.