Expect staff cost to inch up YoY

We recently hosted Raffles Medical at the OSK|DMG ASEAN Corporate Day. Key takeaways from the meetings: (1) Staff cost is expected to increase YoY, with increased headcount to prepare for operations at Thong Sia Building. (2) Continues to look out for suitable overseas expansion opportunities. (3) Dividend payout is likely to remain at about 40%. We continue to like Raffles Medical for its resilience and stable growth. Maintain BUY with DCF-based TP of S$2.67.

Increased headcount to prepare for expanded operations. Raffles Medical hired more staff as it prepares for operations at Thong Sia (its Specialist Medical Centre) and its hospital extension. Its plans for Thong Sia are progressing on track, and partial operations are expected in mid-2013, when a significant number of current tenants move out. Its hospital extension project is progressing well and construction is expected to be completed in 2015. Management also recently adjusted the salaries of its doctors, which would also contribute to YoY higher staff costs from 2Q onwards. However, management is optimistic that they would be able to progressively revise its prices upwards and still maintain competitiveness, given that its charges are still much lower than the other private hospitals. It aims to keep staff cost to below 50% of revenue (we are estimating 48%).

Still on the lookout for regional expansion opportunities. Raffles Medical remains interested in expanding its operations regionally. It remains keen in the China, Malaysian and possibly Vietnam markets, although management maintains that it would only proceed with the right partner. While it has a strong balance sheet and stable cash flows, management does not rule out the possibility of carrying out fund raising activities should there be a need.

Expects to maintain dividend payout. While Raffles Medical does not have a fixed dividend policy, management intends to keep the dividend payout ratio at 40%.

Due for a Re-rating

Cheapest hospital stock now, upgrade to BUY. The 11% dip in share price from its February high of SGD2.44 has resulted in Raffles Medical Group (RMG) emerging as the cheapest hospital stock in the region. We believe that the defensive nature of its hospital earnings is a strong attribute in an uncertain market. We upgrade our recommendation from HOLD to BUY, given its widening valuation discount relative to peers. Our DCF-based target price is lowered marginally to SGD2.71 after some minor adjustments.

Premium valuations intact. Despite the recent sell-off in equity markets, hospital stocks have managed to hold on to their premium valuations, trading at above-market average PERs of about 26x. Aside from defensive earnings, anticipation of renewed interest in the healthcare sector could have provided stock support, in the hope of a positive re-rating in valuations for the sector.

No competition from Novena suites. Parkway Pantai’s 333-bed Mount Elizabeth Novena Hospital is expected to open next month with 180 beds operating initially and the rest to come on-stream by the end of the year. Though this marks one of the biggest increases in private hospital beds in more than 10 years, we do not expect any major negative impact on RMG as the new hospital targets the high-end segment of the market.

Cost containment manageable. RMG’s greatest challenge lies in managing staff cost, which is estimated at 48% of its total revenue. The Singapore government intends to increase healthcare professionals’ wages by an average of 20% by 2014. RMG would need to respond correspondingly with a competitive compensation structure to retain and attract staff. Nevertheless, we note that it still has room to raise its charges and intends to do so, given that its average surgical cost is lower than that of Singapore General Hospital, a public hospital.

Strongest balance sheet. RMG has the strongest balance sheet among its peers, being the only one in a net cash position. Even after accounting for capex for its expansion plans, we expect it to remain in a net cash position, helped by its strong operating cash flow generating capability. Upgrade to BUY.

Due for a Re-rating

Cheapest hospital stock now, upgrade to BUY. The 11% dip in share price from its February high of SGD2.44 has resulted in Raffles Medical Group (RMG) emerging as the cheapest hospital stock in the region. We believe that the defensive nature of its hospital earnings is a strong attribute in an uncertain market. We upgrade our recommendation from HOLD to BUY, given its widening valuation discount relative to peers. Our DCF-based target price is lowered marginally to SGD2.71 after some minor adjustments.

Premium valuations intact. Despite the recent sell-off in equity markets, hospital stocks have managed to hold on to their premium valuations, trading at above-market average PERs of about 26x. Aside from defensive earnings, anticipation of renewed interest in the healthcare sector could have provided stock support, in the hope of a positive re-rating in valuations for the sector.

No competition from Novena suites. Parkway Pantai’s 333-bed Mount Elizabeth Novena Hospital is expected to open next month with 180 beds operating initially and the rest to come on-stream by the end of the year. Though this marks one of the biggest increases in private hospital beds in more than 10 years, we do not expect any major negative impact on RMG as the new hospital targets the high-end segment of the market.

Cost containment manageable. RMG’s greatest challenge lies in managing staff cost, which is estimated at 48% of its total revenue. The Singapore government intends to increase healthcare professionals’ wages by an average of 20% by 2014. RMG would need to respond correspondingly with a competitive compensation structure to retain and attract staff. Nevertheless, we note that it still has room to raise its charges and intends to do so, given that its average surgical cost is lower than that of Singapore General Hospital, a public hospital.

Strongest balance sheet. RMG has the strongest balance sheet among its peers, being the only one in a net cash position. Even after accounting for capex for its expansion plans, we expect it to remain in a net cash position, helped by its strong operating cash flow generating capability. Upgrade to BUY.