Under our Healthcare sector coverage for the recently concluded 4QCY11 results period, Raffles Medical Group (RMG) reported results which were in line with our expectations, while Biosensors International Group’s (BIG) core earnings came in slightly below our estimates. Both companies continued to showcase healthy growth trends, although BIG’s financials were boosted by the consolidation of JW Medical Systems. For RMG, we also like its high earnings quality and opine that it is sustainable, backed by its strong operating cashflow generating ability and robust industry fundamentals.
New listings could rekindle hype in sector
Media reports have recently highlighted Fortis Healthcare’s plans to list a
US$400m business trust on SGX in 2Q12, following its decision to postpone the IPO of Religare Healthcare Trust last year due to unfavourable market conditions1. Another anticipated IPO could come from Khazanah Nasional’s listing of Integrated Healthcare Holdings (IHH) in 2H12, with a dual listing in Singapore and Malaysia a possibility. This could potentially raise proceeds of US$3b2. As a recap, Parkway Holdings (now part of IHH) was privatised in 2010 at ~37x trailing PER (based on EPS before exceptional items). Should this IPO materialise at similar, if not higher valuations, it might provide an impetus for a re-rating of the sector.
Maintain OVERWEIGHT on Healthcare sector
In our opinion, RMG [BUY; FV: S$2.66] would likely benefit the most in the event of a sector re-rating under the aforementioned circumstances, given its leading position as a quality private healthcare service provider. We reiterate our OVERWEIGHT rating on the Healthcare sector, underpinned by well-entrenched fundamentals such as growing affluence in the region and an aging population. Meanwhile, BIG [BUY; FV: S$1.95] remains our top pick in the sector. We see its recent share price weakness as a good buying opportunity.
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Elaborated details on improving Singapore’s healthcare landscape
Singapore’s Minister of Health Mr. Gan Kim Yong yesterday unveiled the ministry’s “Healthcare 2020” Masterplan, highlighting its elaborated plans to boost Singapore’s healthcare landscape as a follow up to Budget 2012’s announced initiatives. Mr. Gan emphasised on the issue of the nation’s aging population, as one in five Singaporeans will be aged 65 and above by 2030, a threefold increase. Given capacity constraints in the public sector, the Ministry of Health (MOH) will strive to increase healthcare capacity, which includes expanding the number of hospital beds (3,700 to be added) and enlarging the pool of healthcare professionals. The pay of healthcare professionals would also be increased in the public sector, which would likely increase the cost pressures for the private sector as well. Hence healthcare companies would need to improve their productivity and efficiency to mitigate this, while it is also possible that they would largely be able to pass through some of these higher costs to consumers in the form of higher prices given the inelasticity of healthcare demand and growing demand for quality healthcare services.
Tapping on the private sector
Another noteworthy initiative highlighted was the intention for MOH to tap on the private sector to share the rising burden of the public sector. This would allow the government to utilise spare capacity at private hospitals, with average bed occupancy rates of ~55%. It was announced that MOH would sign an MOU with RMG’s Raffles Hospital for it to take on some subsidised patient load. We are positive on this move given that this will provide RMG with an additional avenue to grow its revenue, while allowing it to better utilise its facilities. RMG’s primary care offerings (GP clinics) is already benefiting from the government’s Community Health Assist Scheme (CHAS), and subsidised tertiary care for its services in the future would help to underpin its growth trajectory moving forward.
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