Month: July 2012
RafflesMed – OCBC
STILL POISED FOR GROWTH
•Strong beneficiary of medical travel growth
•Capacity to increase in stages
•Raising fair value to S$2.73
Healthy medical travel growth trend
We believe that Raffles Medical Group (RMG) would continue to benefit strongly from the healthy uptrend in medical travellers to the region, despite growing supply of new hospital beds from both local and regional competitors. This is premised on the group’s competitive pricing vis-à-vis its comparable peers, strong brand equity and continued drive to enhance the depth of its specialist offerings. Research firm Frost & Sullivan projected that the number of medical travellers to Singapore and the corresponding revenues generated would grow at a CAGR of 12.4% and 13.6% to 851k and S$2.03b, respectively, from 2012 to 2016.
Steady expansion plans to address rising demand
RMG’s new Specialist Centre in Orchard is scheduled to begin operations in 1H13, while its Raffles Hospital extension (additional 102,408 sf) is expected to be completed in early 2015. In the meantime, management has actively decanted some of its existing hospital facilities. This resulted in the opening of a Neuroscience specialist centre in Apr, while renovation works are ongoing for the expansion of its Health Screening facilities. We reckon this would improve its income streams as there could be follow-up treatment procedures.
Ease our margin assumptions slightly, but maintain BUY
RMG recently implemented wage increments across the board in 2Q12, driven by the Singapore government’s initiative to raise salaries in the public healthcare sector. We ease our EBIT margin assumptions and our PATMI forecasts for FY12 and FY13 are reduced by 2.1% and 1.4%, respectively. We believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre. While these additional staff would also aid in the generation of revenue at existing premises now, pre-operating expenses incurred would cause some drag on its earnings as their contribution is not at an optimal level yet, in our view. We roll-forward our valuations to 24x blended FY12/13F EPS, which in turn raises our fair value estimate from S$2.58 to S$2.73. Maintain BUY.
RafflesMed – OCBC
STILL POISED FOR GROWTH
•Strong beneficiary of medical travel growth
•Capacity to increase in stages
•Raising fair value to S$2.73
Healthy medical travel growth trend
We believe that Raffles Medical Group (RMG) would continue to benefit strongly from the healthy uptrend in medical travellers to the region, despite growing supply of new hospital beds from both local and regional competitors. This is premised on the group’s competitive pricing vis-à-vis its comparable peers, strong brand equity and continued drive to enhance the depth of its specialist offerings. Research firm Frost & Sullivan projected that the number of medical travellers to Singapore and the corresponding revenues generated would grow at a CAGR of 12.4% and 13.6% to 851k and S$2.03b, respectively, from 2012 to 2016.
Steady expansion plans to address rising demand
RMG’s new Specialist Centre in Orchard is scheduled to begin operations in 1H13, while its Raffles Hospital extension (additional 102,408 sf) is expected to be completed in early 2015. In the meantime, management has actively decanted some of its existing hospital facilities. This resulted in the opening of a Neuroscience specialist centre in Apr, while renovation works are ongoing for the expansion of its Health Screening facilities. We reckon this would improve its income streams as there could be follow-up treatment procedures.
Ease our margin assumptions slightly, but maintain BUY
RMG recently implemented wage increments across the board in 2Q12, driven by the Singapore government’s initiative to raise salaries in the public healthcare sector. We ease our EBIT margin assumptions and our PATMI forecasts for FY12 and FY13 are reduced by 2.1% and 1.4%, respectively. We believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre. While these additional staff would also aid in the generation of revenue at existing premises now, pre-operating expenses incurred would cause some drag on its earnings as their contribution is not at an optimal level yet, in our view. We roll-forward our valuations to 24x blended FY12/13F EPS, which in turn raises our fair value estimate from S$2.58 to S$2.73. Maintain BUY.
M1 – OCBC
LIKELY STABLE 2Q12 SHOWING
•2Q12 earnings likely to be S$41.6m
•Likely beneficiary of faster NBN connection rate
•Laggard among telcos
Likely stable 2Q12 showing
M1 Ltd is due to report its 2Q12 results on 16 Jul, where we expect the telco to put in a relatively stable showing. We forecast for revenue to come in around S$250m, up 1.9% YoY, but net profit to fall 2.8% YoY to S$41.6m. On a sequential basis, revenue is likely to fall 4.8%, but net profit should climb 3.2%.
May benefit from stepped-up NBN connection rate
On the NBN front, IDA (Infocomm Development Authority) now requires OpenNet to, starting from Aug, increase its weekly customer connection by nearly 30% to 3,100 from a revised 2,400. This is to reduce the waiting time, which was reported to be as long as six weeks. In addition, IDA has asked OpenNet to put in place a process to cater for sudden spikes in demand, especially during the quarterly computer trade shows. We believe that the increased connection rate would benefit M1 most. This is because M1 1) has a small base, 2) does not have much of a legacy system issue since its current cable modem bandwidth is leased from StarHub, and 3) could further
penetrate into the corporate segment, especially in the more price sensitive SME space.
Laggard among the telcos
Year-to-date, M1's share price has only risen 2.4%, as compared to SingTel's 11.0% climb and StarHub's 24.4% increase over the same period. One reason for M1's underperformance is probably linked to its lack of bundling of services. But we think this concern is probably overdone, given that M1 has been able to defend its mobile market share, despite it having the highest churn rate among the three telcos. And because M1 is not involved in the highly competitive Pay TV arena, it does not have to deal with rising content costs. As a result, M1 is experiencing less pressure on margins. We continue to like M1 for its defensive earnings and relatively attractive dividend yield of 5.7%. Maintain BUY with S$2.81 fair value.
ComfortDelgro – CIMB
SBS Transit to add 1,000 more buses for S$433m
Additional buses are part of fleet renewal programme, no changes to capex. SBST has announced that they will be adding 1,000 new buses from Jan 2013 to 2015 at a cost of S$433m. This announcement does not come as a surprise as the additions to the fleet are part of CD’s fleet renewal programme which started in 2006. Our capex assumption of S$500m for FY12 has factored in this increase in bus fleet. We think near term earnings impact could be minimal as current bus operation losses for CD accounts for about 1.5% of overall EBIT. Moreover, this scheme will be rolled out over a span of a few years therefore any earnings impact is expected to be spread out. Maintain BUY on CD, with DCF derived TP of S$1.75.
26% of new fleet funded through BSEP. SBST has announced that they will be adding 1,000 new buses from Jan 2013 to 2015 at a cost of S$433m. SBST has also commented that close to 90% of its bus fleet will be new by 2015, and its fleet size is expected to increase by about 13% to 3,400 buses, which will be its largest to date. Out of the 1,000 new buses, 260 of them will be funded under the Bus Services Enhancement Programme (BSEP), while SBST will fund the remaining 740.
Recall the BSEP announced during Singapore Budget. During the Singapore Budget in Feb 2012, it was announced that the government will increase public bus fleet by 800 buses over the next five years, and of the total 800 buses, 550 (69%) will be funded by the government while the remaining 250 (31%) will be provided by the public transport operators.
StarHub – Kim Eng
It’s Been A Stellar Ride
Time to say goodbye. Our long-standing buy call on StarHub has been rewarding. However, it is time to say goodbye and we advise clients to take profit. The stock has raced to an all-time high amidst the current risk-off environment and its dividend yield has compressed to the lowest level since listing. Going by our DDM model, the share price has already discounted a 20% rise in dividends, but our original expectations of higher dividends may be dashed by an upcoming 4G spectrum auction in 2013. Management has also indicated there will be no capital management or reduction initiatives. Assuming dividends stay flat at SGD0.20 a share, our DDM-derived target price is SGD3.04 or 15% below the current level. SELL into the current strength.
Stock is overvalued if dividend stays put. StarHub has almost reached our DDM-derived TP of SGD3.64, which had assumed a 20% rise in annual dividends to SGD0.24 a share. However, the 4G spectrum auction in 2013 may lead to a rise in cash commitment next year, which could reduce the company’s willingness to increase dividend payout. If dividends stay put at the current SGD0.20 a share, the stock is now overvalued, with a DDM-derived TP of SGD3.04.
Spectrum cost to push up 2013 cash needs. Using past auctions to provide a pricing benchmark, StarHub may need to pay SGD110-131m for refarmed 4G spectrum. An auction is likely to be held in 1H 2013. This could bump up 2013 cash requirements by 43-51% and push 2013 net debt/EBITDA from 0.63x to 0.78-0.81x. While this should not endanger its current SGD0.20 DPS, it may undermine our original thesis that StarHub can afford to increase its dividends.
Absolute valuations also difficult to justify. At the current level, StarHub is yielding just 5.6% on its ordinary dividend, the lowest since it was listed in 2004 and started paying dividends in 2005. The spread between dividend yield and the 10-year Singapore government bond yield has also narrowed to its tightest level yet, a mere 400bp, since the bond itself was issued in 2007. Dividend yield is also barely hedging against domestic inflation of 5% (as at May 2012).