RafflesMed – CIMB

Ready to rumble

ASEAN healthcare stocks have found a new lease of life, with share prices being re-rated amid increased trading volume. But is this happening on the back of an upcoming new listing or are there other catalysts?

We found various themes at work, including a lack of new capacity that is driving healthcare inflation in Singapore. An eventual unlocking of the value of RFMD's real estate for capital recycling could be on the cards. Maintain Outperform, EPS and target price at 20x CY13 P/E, its mid-cycle valuations.

No beds: good or bad?

Singapore's hospital bed shortage is an acute problem. The country has a lower bed ratio (2.22 beds per 1,000 people in 2010) than other developed nations. Though the government has been increasing bed capacity at public hospitals (through expansion and new developments), public hospitals are still unable to cater to rising demand for hospital beds. With capacity constraints in public and other private hospitals, patient loads at RFMD's flagship Raffles Hospital have been good.

Healthcare costs are surely rising

RFMD is creating capacity at its flagship hospital. When completed, the group will be able to increase its clinical services and specialist offerings. We expect the additional space to come on stream in FY14. With re-adjustments in in-patient billings and other charges, we see ample room for RFMD to catch up with its rates, albeit gradually initially (5-10% in FY12).

Catch this laggard

RFMD's balance sheet has been stronger than peers with a net cash position, though there may be additional capex in the next few quarters. ROEs are also strong, the result of the consistent return of spare cash to shareholders in the form of dividends. Valuation-wise, the stock is at 17x CY13 P/E (22.5x for peers) and 11x CY13 EV/EBITDA (Asian sector average of 14x).

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