RafflesMed – Kim Eng
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.
TELCOs – Kim Eng
Let the BPL Money Games Begin
Buy StarHub to hedge rising cost of BPL TV rights. British soccer fans have just agreed to hand over GBP3b to the Premier League, the richest soccer league in the world, as the 2013-2016 UK TV rights were recently sold at a 71% premium over the last three seasons. In Singapore, soccer fans will have no choice but to tighten their belts yet again. However, we think StarHub will be the ultimate winner, even if SingTel decides to throw caution to the winds and bids aggressively. BUY StarHub to hedge against the rising cost of watching your favourite team; SingTel remains a SELL.
BPL scores huge TV rights win at home. The world’s richest soccer league, Premier League, just got a billion pounds richer. British pay TV broadcasters BSkyB and BT recently agreed to fork out GBP3.04b over the next three years for the UK domestic live TV broadcast rights for the 2013-2016 seasons, a 71% rise over the cost of the rights for the 2010-2013 seasons. BPL stars Yaya Toure and Mario Balotelli (despite his goal drought) can look forward to even more lavish pay hikes.
What will happen to Singapore? The worst case scenario is both telcos and Premier League walk away from the negotiation table, which we think is unlikely. Given the presence of cross-carriage laws this time round, it is more plausible that Premier League will allow a joint bid between SingTel and StarHub that will result in it receiving a sum more than the estimated SGD425m SingTel paid for the 2010-2013 seasons.
No good news for soccer fans. Whichever the scenario, there is unlikely to be any good news for soccer fans; just various degrees of bad. Assuming a joint bid is possible and a 30% rise in TV rights cost over the 2010-2013 seasons, as mooted in Hong Kong-based reports, our best case scenario suggests that subscribers will still need to pay between SGD27 and SGD35 more a month to watch BPL, which we think is still reasonable.
Odds are with StarHub. In the final analysis, we think StarHub will watch the dollars and cents and refrain from harming its generous dividend policy by bidding too aggressively, even if it does bid jointly with SingTel. If SingTel decides to be as aggressive as it was in 2009 and clinches the rights to the three seasons, the cross-carriage law will work to StarHub’s advantage. In such a tactical strategy game, we think the odds (and investors’ favour) are with StarHub.
SPH – CIMB
Pseudo retail REIT
With a growing retail property arm and stable media business, SPH is increasingly like a retail REIT with limited cash-call risks, in our view. Offering forward yields of 6.4% vs.6.1% for retail S-REITs after its YTD underperformance, we think it offers a cheaper alternative.
We raise our EPS marginally on property rental adjustments and our SOP target price after rolling one year forward. We also raise DPS on less conservative payout assumptions. Upgrade from Neutral to Outperform. We see catalysts from higher-than-expected ad growth.
Retail malls for growth
With a stable and mature print business, we expect SPH’s growth to come increasingly from its retail malls. Revenue CAGR for SPH’s gem asset, Paragon, had been an impressive 8.3% over 2006-11, outstripping that for comparable assets under retail S-REITs. We expect similar success for its Clementi Mall during its first renewal cycle; with the success extending to its Sengkang Mall on completion.
Stable media business to underpin cashflows
We expect its newspaper & magazine segment to remain dominant and underpin SPH’s cashflows. We expect a seasonally stronger 3QFY12, as strong property, auto and telco display ads mitigate lukewarm GSS ad demand and weaker recruit and classifieds.
Pseudo retail REIT
With typical payouts of >90%, we believe SPH is akin to a retail REIT. Against retail REITs, SPH stands out for its stronger balance sheet and thus limited cash-call risks, in our view. 2Q12 net gearing is low at 35% with property asset values booked at historical costs less depreciation. With a growing property arm, we do not dismiss the possibility of a spin-off or sale of assets to a REIT over the longer term.
Cheaper alternative
SPH has underperformed retail S-REITs YTD and during the recent flight to safety. Yields are now 6.4% vs. an average of 6.1% for retail S-REITs. We see SPH as a cheaper alternative for investors seeking exposure to retail S-REITs.
SPH – CIMB
Pseudo retail REIT
With a growing retail property arm and stable media business, SPH is increasingly like a retail REIT with limited cash-call risks, in our view. Offering forward yields of 6.4% vs.6.1% for retail S-REITs after its YTD underperformance, we think it offers a cheaper alternative.
We raise our EPS marginally on property rental adjustments and our SOP target price after rolling one year forward. We also raise DPS on less conservative payout assumptions. Upgrade from Neutral to Outperform. We see catalysts from higher-than-expected ad growth.
Retail malls for growth
With a stable and mature print business, we expect SPH’s growth to come increasingly from its retail malls. Revenue CAGR for SPH’s gem asset, Paragon, had been an impressive 8.3% over 2006-11, outstripping that for comparable assets under retail S-REITs. We expect similar success for its Clementi Mall during its first renewal cycle; with the success extending to its Sengkang Mall on completion.
Stable media business to underpin cashflows
We expect its newspaper & magazine segment to remain dominant and underpin SPH’s cashflows. We expect a seasonally stronger 3QFY12, as strong property, auto and telco display ads mitigate lukewarm GSS ad demand and weaker recruit and classifieds.
Pseudo retail REIT
With typical payouts of >90%, we believe SPH is akin to a retail REIT. Against retail REITs, SPH stands out for its stronger balance sheet and thus limited cash-call risks, in our view. 2Q12 net gearing is low at 35% with property asset values booked at historical costs less depreciation. With a growing property arm, we do not dismiss the possibility of a spin-off or sale of assets to a REIT over the longer term.
Cheaper alternative
SPH has underperformed retail S-REITs YTD and during the recent flight to safety. Yields are now 6.4% vs. an average of 6.1% for retail S-REITs. We see SPH as a cheaper alternative for investors seeking exposure to retail S-REITs.
SingPost – Kim Eng
Parcel Is the New Mail
All the right moves, reiterate BUY. As its restructuring continues, we believe that SingPost is making all the right moves to fend off the negative impact from the sustained decline in global physical mail volume. Our visit to the company last week reaffirmed our view that investors stand to benefit in the long term from its transformation while being protected in the short-to-medium term by its stable dividend payout. We reiterate our BUY call with a target price of SGD1.10 based on 5.7% yield, the average of the top 15 dividend yield stocks in the Maybank Kim Eng coverage universe.
Five pillars, over 20 initiatives. In the face of dwindling global mail volume, newly-minted CEO Dr Wolfgang Baier has introduced the “five pillars” concept, which encompasses over 20 initiatives, in his bid to move SingPost to a new business model. At the core of the strategy is diversification both geographically and product-wise. In our view, the parcel business has a better chance of taking off first, as the investments in Quantium and vPOST are starting to pay off.
Large-scale acquisitions this year or next to surprise the market. SingPost currently sits on a cash balance of SGD617m after the issue of perpetual securities worth SGD350m in Mar 2012. The market has been slightly disappointed that its acquisitions since 2009 have all been small in scale. But it is possible that SingPost would spring a surprise this year – or next – with some large-scale acquisitions.
More cost efficient than peers. While cost pressure will persist in the next few years, we believe that SingPost is one of the most cost-efficient postal organisations among its peers, thanks to its investments in automation and geographical divestment.
Sufficient cash flow to support dividend payout. SingPost has committed to a minimum dividend payout of SGD5cents per share pa. However, based on its operating cash flow generation and recent fund-raising, we believe that it is well able to maintain its track record of SGD6.25cents per share.