Healthcare – OCBC

Another takeover bid highlights attractiveness

Higher value addition in 2009. The total operating surplus of Singapore’s health services industry increased 7.1% to S$995m in 2009, according to a recent study by the Department of Statistics. This was due to a 8.3% increase in operating receipts to S$8.20b, partially offset by a 9.1% rise in operating expenditure to S$7.57b. Overall, the total value addition generated by the health services industry was S$4.37b, representing an increase of 7.3% over 2008.

Privatisation fervour highlights increasing sector attractiveness. Parkway Holdings announced its proposal to be delisted after the successful acquisition by Khazanah Nasional. We believe that Thomson Medical Centre (TMC) could follow suit after prominent investor Peter Lim’s general offer to acquire its shares at S$1.75 a piece. This represents an attractive 62.0% premium to its closing price prior to the takeover announcement, and values TMC at 33.5x PER. As this is substantially higher than TMC’s 15.0x historical average PER, shareholders would likely accept the offer, in our opinion. This is a testament of the high quality of healthcare providers here and has generated renewed hype in the healthcare sector. The spillover effects were seen in Raffles Medical Group’s (RMG) share price rising 5.5% (current PER of 26.4x) on the next trading day after the announcement.

Medical device industry performing well too. Medical device companies have benefited from the rising incidence of diseases. Technological expertise and safety are key differentiating factors. Biosensors International Group (BIG), for example, is technologically superior to its peers, in our view, because of its biodegradable polymer drug-eluting stent. It has also recently increased its capabilities with the acquisition of Devax Inc., allowing it to treat bifurcation lesions now.

Increasing regional competition. Many regional countries are vying for the lucrative medical tourism business. The Union Tourism Ministry of India has estimated that its medical tourism sector could be worth more than US$2b by 2012. However, India is mainly targeting the Americans whereas Singapore healthcare providers serve mainly patients from neighbouring countries such as Indonesia and Malaysia. Healthcare providers here also have a competitive edge in terms of being able to offer sophisticated and higher quality medical procedures. We have a HOLD rating on RMG [FV: S$2.35] because we believe current market valuations have already factored in its strong fundamentals. On the other hand, we have a BUY rating on BIG [FV:S$1.30]. We like BIG for its cutting-edge technology and strategy in coming up with innovative new products to stay ahead of its competition.

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