Blessing wearing its disguise

Market intelligence suggests that RFMD may no longer be the medical service provider to the Singapore Prison from Dec 12.This could actually benefit its profitability. Yes, the contract size appears huge but the economics is a lot more than meets the eye.

We believe RFMD intends to rationalize its manpower and other resources to focus on chasing higher-margin healthcare businesses. Our EPS and target price, at 22x CY13 P/E(mid-cycle valuations), are unchanged. Maintain Outperform with catalysts expected from higher in-patient billings.

What Happened

There have been murmurings that RFMD will no longer be the medical service provider to the Singapore Prison come Dec 12, when its present contract expires. The estimated value of the new contract from the Ministry of Home Affairs is roughly S$300m, for 5+3 years, starting 2013.

What We Think

We do not think this is such bad news. In fact, we would applaud any such development. From a revenue-profit perspective, we think there is not much operating leverage from its previous public contract. Actual contribution to group revenue is roughly 4%, while net contribution is less than 2.5%.We believe new branches opened in recent years have more than replaced this source of revenue. Also, from a cost perspective, the manpower and resources spent do not favour the economics now unlike the past. With tighter restriction of the employment of foreign labour and new initiatives for expansion (new specialist centre, new wing and various new branches), management would be better off focusing its resources on its current private healthcare business, in our opinion.

What You Should Do

Stay invested. With readjustments in its inpatient billings, we see ample room for RFMD to catch up with rates, albeit gradually initially (5-10% in 4Q12). This provides scope for the company to close its pricing gap with its competitors. RFMD is still a laggard stock in this sector; it has a strong balance sheet among peers in the region. ROEs have also been strong. Maintain Outperform.

Courting Miss Hong Kong

RFMD has submitted its tender for a private hospital development in Hong Kong. While there are no details of tender pricing or capex guidance, we believe the move is a positive one as the healthcare dynamics in Hong Kong now favour new curative healthcare players.

This tender is the most concrete overseas expansionary commitment the group has made since setting up its medical centre in Shanghai in 2010. Our forecasts and target price, pegged at 22x CY13 P/E, reflecting its mid-cycle valuation, are unchanged. Maintain Outperform.

What Happened

RFMD has submitted a tender called by the Hong Kong Government for the development of a private hospital on the Aberdeen Inland Lot No. 458 site. Tender results are likely be released in 4Q12.

What We Think

There are a few factors that favour new curative healthcare players in the Hong Kong market, including frequent long waiting lists for public hospitals causing a spillover to private sector and PRC patients choosing Hong Kong as a destination for their medical needs. All these are expected to drive the demand for private sector medical services in the territory.

When asked, management was understandably tight-lipped about the tender pricing. What we do know is that the site can accommodate a 300-500 bed hospital that will sit on a built-up of between 28,000–46,000 sq meters. Land premium is roughly 30% of the weightage. Good evidence-based medical practice, professional development, quality assurance as well as consistency and transparency in charging professional fees are also criteria being evaluated. Should the group be successful in this tender, capex requirements will only come in by 2Q13 and are to be paid progressively over three years.

What You Should Do

Stay invested. With readjustments in its inpatients billings, we see ample room for RFMD to catch up with rates, albeit gradually initially (5-10% in 4Q12). This provides scope for the company to close its pricing gap with its competitors. RFMD is still a laggard play in this sector; it has a strong balance sheet among peers in the region. ROEs have also been strong. Maintain Outperform.

Courting Miss Hong Kong

RFMD has submitted its tender for a private hospital development in Hong Kong. While there are no details of tender pricing or capex guidance, we believe the move is a positive one as the healthcare dynamics in Hong Kong now favour new curative healthcare players.

This tender is the most concrete overseas expansionary commitment the group has made since setting up its medical centre in Shanghai in 2010. Our forecasts and target price, pegged at 22x CY13 P/E, reflecting its mid-cycle valuation, are unchanged. Maintain Outperform.

What Happened

RFMD has submitted a tender called by the Hong Kong Government for the development of a private hospital on the Aberdeen Inland Lot No. 458 site. Tender results are likely be released in 4Q12.

What We Think

There are a few factors that favour new curative healthcare players in the Hong Kong market, including frequent long waiting lists for public hospitals causing a spillover to private sector and PRC patients choosing Hong Kong as a destination for their medical needs. All these are expected to drive the demand for private sector medical services in the territory.

When asked, management was understandably tight-lipped about the tender pricing. What we do know is that the site can accommodate a 300-500 bed hospital that will sit on a built-up of between 28,000–46,000 sq meters. Land premium is roughly 30% of the weightage. Good evidence-based medical practice, professional development, quality assurance as well as consistency and transparency in charging professional fees are also criteria being evaluated. Should the group be successful in this tender, capex requirements will only come in by 2Q13 and are to be paid progressively over three years.

What You Should Do

Stay invested. With readjustments in its inpatients billings, we see ample room for RFMD to catch up with rates, albeit gradually initially (5-10% in 4Q12). This provides scope for the company to close its pricing gap with its competitors. RFMD is still a laggard play in this sector; it has a strong balance sheet among peers in the region. ROEs have also been strong. Maintain Outperform.

Valuation gap has closed

• Raffles Medical reported a 14.9% YoY increase in 2Q12 revenue to SGD76.9m while corresponding net profit rose by 6.9% YoY to reach SGD12.4m. Results were within our expectations with 1H12 net profit making up 44% of our FY12F forecast. The company also declared an interim dividend of 1.0 cents per share.

• As expected, the company experienced margin compression due to higher staff cost, following wage and headcount increases. However, Raffles Medical has the capacity to raise pricing and we expect it to do so in the following quarters, which would mitigate the effects of the higher staff cost.

• We previously highlighted the deep valuation discount between Raffles Medical and its peers. Given the 18% surge in share price after our last BUY call, the valuation gap has now closed. While we maintain our SGD2.71 DCF-based target price, we downgrade the stock to a HOLD given that potential upside is now 5%. Implied FY12F/13F PERs based on our target price are 26.7x and 23.3x respectively.

Valuation gap has closed

• Raffles Medical reported a 14.9% YoY increase in 2Q12 revenue to SGD76.9m while corresponding net profit rose by 6.9% YoY to reach SGD12.4m. Results were within our expectations with 1H12 net profit making up 44% of our FY12F forecast. The company also declared an interim dividend of 1.0 cents per share.

• As expected, the company experienced margin compression due to higher staff cost, following wage and headcount increases. However, Raffles Medical has the capacity to raise pricing and we expect it to do so in the following quarters, which would mitigate the effects of the higher staff cost.

• We previously highlighted the deep valuation discount between Raffles Medical and its peers. Given the 18% surge in share price after our last BUY call, the valuation gap has now closed. While we maintain our SGD2.71 DCF-based target price, we downgrade the stock to a HOLD given that potential upside is now 5%. Implied FY12F/13F PERs based on our target price are 26.7x and 23.3x respectively.