Thomson Medical – DMG

Stands to benefit from new Parenthood Package

Government initiatives to boost birth rates. The Singapore government announced a new enhanced parenthood package to encourage couples to have more children. Sweeteners to the package include enhanced tax benefits, baby bonus, and leave measures, as well as support for couples who have difficulties conceiving. The enhanced benefits take effect from 2009. The revised package also extends the relevant benefits to beyond the fourth child. The budget for the Parenthood Package is also expected to increase to S$1.6b when it is fully implemented, up from the current budget of S$800m.

We believe TMC stands to benefit the most. Parents stand to benefit from the enhance Package, from higher tax benefits to increased childcare subsidies. As such, couples would be encouraged to start having children soon, or have more children. On top of that, the increased benefits would free up more cash for parents. Hence, they may be more willing to spend on optional medical tests for their newborns, which could result in additional revenue for the hospitals.

In turn, this would benefit the three medical providers (Raffles Medical Group, Parkway and Thomson), as all three provide O&G services. However, with its focus on O&G services, we believe TMC would stand to benefit the most from the expected increase in demand for such services. The enhanced Package also bodes well for its Thomson Fertility Centre, as couples may be more willing to seek fertility treatments.

TMC offers competitive rates. Among the private hospitals, TMC’s average hospital bill is one of the lowest (based on 50th percentile bill size), making it an attractive private hospital to go to for baby deliveries. Coupled with the enhanced Package encouraging couples to have more babies, we expect the volume of deliveries at TMC to increase, boosting its revenue and earnings growth.

We maintain our earnings estimate of S$11.2m (EPS: 3.8 S¢) for FY08 and S$12.3m (EPS: 4.2 S¢) for FY09. We have a fair value of S$0.76 for the stock, based on 19x FY08/09 blended earnings. At the current price of S$0.57, this presents a potential upside of 33.3%. We maintain our BUY recommendation on TMC.

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