RafflesMed – OCBC
TIME TO REVISIT THIS STOCK
- Seasonal 2H strength to continue
- Expect margin expansion in FY13
- Trading at undeserved discount to major peers
Expect stronger 2H12 and FY13
We expect the seasonally stronger 2H trend for Raffles Medical Group (RMG) to continue in FY12, despite rising staff costs. This is supported by expected traction gains in its patient loads and room to raise charges, albeit on a gradual basis, given its competitive pricing vis-àvis its major peers. We forecast RMG’s 2H12 revenue and core earnings to increase 8.2% and 24.0% HoH to S$162.1m and S$29.8m, respectively. This also translates into a growth of 14.6% and 14.1% YoY, respectively. For FY13, we believe that the commencement of operations at its new Specialist Centre in 1H13 would help boost RMG’s net margin from 17.3% in FY12F to 17.7% in FY13F. This would be driven by improved economies of scale, increased referrals to its Raffles Hospital and better utilisation of manpower which were hired in preparation for its enlarged operations.
Favourable valuations vis-à-vis major peers
Based on forward PER valuations, RMG currently ranks as the second cheapest stock amongst its direct comparable peers from Singapore, Malaysia, India and Thailand, despite delivering the second highest estimated net margin, according to Bloomberg consensus data. We further conduct our analysis on the PER trends of RMG and its peers set, and note that the ratio of RMG’s PER relative to its peers’ average is currently at a 13.5% discount to their 5-year average.
Roll forward our valuations and upgrade to BUY
Since we downgraded RMG to ‘Hold’ on 24 Jul 2012, its share price has trended 4.3% downwards, underperforming the STI by 7.1%. While we are retaining our forecasts, we roll forward our valuations on RMG to 24x FY13F EPS. This correspondingly bumps up our fair value estimate from S$2.63 to S$2.82. Coupled with a dividend yield of 1.6% (FY13F), we upgrade RMG from Hold to BUY given potential total returns of 15.8%. Our upgrade is also reinforced by continued uncertainty over the macroeconomic backdrop, which we believe would provide an investment merit for defensive counters which also generate strong operating cashflows, such as RMG.
STEng – Phillip
Partners DCNS for major US defence project
Company Overview
ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.
- STE partners DCNS for the USCG OPC contract
- Long gestation period for the project
- Greater clarity on the project when the USCG awards the initial contracts to three shipyards in 2013
- Maintain Accumulate with unchanged TP of S$3.40
What is the news?
STE recently announced that their US based subsidiary, VT Halter Marine (VTHM), signed a partnership agreement with DCNS to submit a proposal to the Department of Homeland Security (DHS) for the design and construction of the US Coast Guard (USCG) Offshore Patrol Cutter (OPC). According to STE’s press release on the collaboration, VTHM would be the prime contractor and DCNS would be the exclusive subcontractor for the OPC platform design.
How do we view this?
According to the details disclosed by the USCG, there were 7 shipyards that had expressed interest in this project as of July 2012. Our research suggests that at least four of the shipyards have a history of business dealings with the USCG. Hence, we expect competition for this contract to be stiff. We believe that there should be greater clarity on the project when the USCG awards the initial contracts to three shipyards in 2013.
Investment Actions?
We remain positive and expect potential contract wins to catalyze the stock. Despite a significant rally since the start of the year, STE would still yield >4% on our estimates. Pending the release of STE’s results in early November, we kept our recommendations and estimates unchanged. Accumulate.
SingTel – Kim Eng
India 3G roaming – To ban or not to ban?
Ban or no ban: who knows? India’s proposed ban on 3G roaming alliances between domestic telcos is only the latest uncertainty in a telecom market already famous for regulatory earthquakes. However, the impact is minimal for a couple of reasons. One, 3G subscribers form just 2-3% of the total number of mobile phone users in India, hence the impact on earnings is relatively small, and two, SingTel and Axiata are insulated by their minority stakes in their Indian associates. We maintain SELLs on SingTel (TP SGD3.03) and Idea (TP Rs68) and BUYs on Axiata (TP MYR7.30) and Bharti Airtel (TP Rs400). We like Bharti for its improving FCF and earnings profile, and Axiata for potential surprises in earnings and dividends.
3G roaming pact ban notices served. Bharti Airtel, along with Idea and Vodafone, said this week that they has received a notice from DoT, the Indian telecom regulator, to stop offering 3G roaming in areas (or “circles”) that it does not have 3G spectrum rights within 60 days. In 2010, Bharti won 3G licences in 13 of the total 22 telecom circles for USD2.3b. In 2011, it entered into 3G roaming agreements with Vodafone and Idea (part of Axiata), giving it a 3G presence in the whole of India. DoT claims that by doing this, the government is not receiving its just dues, and wants it stopped.
Telcos are appealing. Naturally, the telcos are appealing against the decision. They claim that there was no specific provision made against roaming pacts when the 3G licences were sold in 2010.
Not a big deal, as 3G subscribers in India are a rare breed. In total, 3G subscribers only account for 2-3% of the total number of mobile subscribers in the country, which hit 672m active users as at Aug 2012. The biggest 3G mobile telco players in India by subscriber size are Reliance Communications (RCOM), Bharti Airtel, Idea Cellular and Vodafone. We estimate Bharti has 5.1m “active” 3G subscribers, followed by Reliance with 4m and Idea with 3.1m. Vodafone has the smallest subscriber base.
Old news, but this is getting old. A possible ban on such 3G roaming pacts is not new, as there has already been numerous warnings since Dec 2011. Given that 2G roaming is allowed, Ganesh Ram our telco analyst in India believes the regulator will eventually also allow the 3G pacts to continue with some modifications. Nevertheless, this creates further uncertainty in a market fraught with regulatory stress lines, most recently being the cancellation of 122 2G licences earlier in 2012.
Minimal impact on Bharti and Idea, as well as their parent companies. If the 3G ban is implemented, Ganesh estimates the earnings impact on Bharti to be negligible. For Idea, the impact will be larger at Rs600m or Rs0.18/share, 8% of his FYMar13 forecast. Ganesh has a BUY on Bharti (TP Rs400) and a SELL on Idea (TP Rs68). As SingTel owns only 15.9% of Bharti Airtel directly and Axiata owns a mere 19.7% of Idea, the impact on SingTel (SELL, TP SGD3.03) and Axiata (BUY, TP MYR7.30) are also negligible.
RafflesMed – CIMB
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.
STEng – OCBC
DEFENSIVE PLAY WITH ROOM TO CLIMB
- Mid-cycle multiple
- Order book may surpass S$13b
- Increasing earnings visibility
Share price can climb further
A safe haven in turbulent times, STE has outperformed the STI significantly since the beginning of the year, rising 29.0% versus the 15.6% increase by the index. The stock reached its 52-week high of S$3.55 last Friday. The counter is trading at a historical P/E multiple of 20.1x and should still have room to climb (about half a standard deviation above 10-year average). STE’s earnings are fairly stable given its four main diversified businesses, which help to reduce its exposure to sector-specific risks. With an attractive FY12F dividend yield of ~4.8%, STE should continue to perform in today’s uncertain but liquidity-rich global economic environment.
ST Marine wins S$179m worth of contracts
It has recently been announced that ST Marine has secured shipbuilding and repair contracts worth ~S$179m. These wins include a contract to build two additional Offshore Support Vessels (OSVs) for Hornbeck Offshore Services, LLC, as well as a series of repair and upgrading projects. With STE’s order book standing at S$12.9b as of end-1H12, we think that it may be greater than S$13b by the end of 3Q12 and expect continued order book growth.
Looking further into the future
We think it is worthwhile noting that STE’s order book clocked at the end of each year has on average grown faster than the following year’s annual revenue. The order book grew 16% p.a. between end-2005 and end-2010 from S$5.38b to S$11.5b while annual revenues grew 6% p.a. between FY06 and FY11. This trend probably suggests that the average tenure of order book contracts has been increasing. The fact that the order book has been growing faster than revenue implies increasing earnings visibility into the future.
Raise fair value to S$3.81
Rolling forward our valuation to blended 2H12/1H13 EPS and increasing our P/E multiple from 20.0x to 20.5x, we raise our fair value from S$3.50 to S$3.81 and maintain a BUY.