Raffles Medical Group

Maybank Kim Eng Research on 25 June 2013

IN recent months, the company has seen expansion plans scuppered, with the unsuccessful tender of a greenfield Hong Kong hospital and failed application to use its Thongsia Building as a medical centre.

In the current market environment, however, we think there is much to love about a company which has been resilient in delivering earnings growth. Organic hospital expansion and a possible China project will add a dose of excitement.

No harm done from these setbacks, as we expect the group to reap a non-operational gain from the sale of Thong Sia Building. Raffles Hospital expansion is still expected to start by this year.

With current bed utilisation at around 60 per cent, we believe there is further room to grow hospital revenue at current trajectory (up around 15 per cent y-o-y in past 12 months).

The company is still in active discussions for the Shekou, Shenzhen hospital. Given the timelines involved upon signing the letter of intent in February 2013, we believe a more concrete development could materialise over the next two months.

We examine the China healthcare industry in more depth and conclude that potential returns from this 200-bed international hospital is comparable to existing matrixes, while the long-term potential is significant for Raffles Medical.

Our primary estimate is that this hospital alone will add around $18.5 million a year in profit (or 30 per cent of current bottomline and 3.4 Singapore cents EPS) once it turns operational.

More aggressive expansion is on the cards. In targeting China, management sees the potential beyond a single hospital, and will likely kick on from there. The company also appears to be adopting a more aggressive stance, after years of conservative organic growth.

Based on our estimates, the company can easily fund both the Raffles Hospital expansion and the potential new Shekou project without going into debt.

There is much to love about this company. Profitability has grown for 16 years in a row and this resiliency is much prized in the current environment.

We upgrade the stock to a "buy", with a new target price of $3.80, factoring in higher cash flows (still based on a three-stage discounted cash flow methodology). This implies 28.8 times FY2013 estimate, which is comparable to Asian-listed peers.

BUY