- Downgrade to HOLD as surge in share price has closed the valuation discount to peers. DCF-based TP is SGD3.94.
- China catalyst not in sight yet despite a year-long gestation, while local competition could rise in the near-term.
- However, premium valuation justified by resilient corporate customer base and diversified foreign patient base.
With a change in analyst coverage, we cut Raffles Medical to HOLD following its recent share price rally that has pushed valuations to record levels. At 33x FY14E P/E, the stock looks fairly valued relative to FY13-16E EPS CAGR of 12.3%. The relative valuation discount vs sector peers has also evaporated. In our view, much of the positives are already in the price. Our DCF-based target price is lowered slightly to SGD3.94 (8% WACC, 2% Tg).
China catalyst not in sight
Raffles Medical announced its initial plans to expand into China in Feb 2013. Up until now however, details have remained sketchy and the preliminary agreements signed in 2013 have yet to solidify into more concrete joint venture agreements. Management said that the company remains committed to the China expansion, but cautioned of possible delays. Even if the projects are confirmed, it would still take 2-3 years for operations to begin.
New private hospital could rock the boat
A new privately-owned hospital – Connexion at Farrer Park – is expected to open its doors next month. The new hospital has a strong Indonesian financial backer. Connexion chairman Dr Maurice
Choo, a cardiologist, has been quoted in the press as saying that they plan to “disrupt the market” with lower prices.
Premium valuation justified
For now, we think Raffles Medical’s premium valuation is justified given its resilient corporate customer base and diversified foreign patient base.
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