Raffles Medical Group (KimEng)

Event

Since our last update, RMG’s share price has trended lower despite the in-line 2Q11 results. At the current share price, it is 19% below its August peak of $2.53 and has broken below its 12-mth low of $2.07. This makes valuation all the more enticing. The Ministry of Health recently announced certain initiatives to be introduced in 2012, which could provide some positive benefits for RMG. Reiterate BUY and maintain target price of $2.80.

Our View

We believe that the recent sell-down on the stock is a result of herd-instinct in the equity market and does not reflect any weakening in fundamentals of RMG. In fact, we are expecting a stronger 2H11 performance. Although the risk of a de-rating exists in this global equity market sell-down, we think that this risk is somewhat diminished for the healthcare sector after the various M&A deals over the past few years, which were done at premium valuations of 23-32x PERs.

The Ministry of Health announced certain new initiatives on 15 August 2011 to be rolled out in 2012. Overall, this would make healthcare more affordable for Singaporeans. Specific initiatives that would benefit private healthcare players such as RMG is the lowering of age criteria and raising of income criteria for the Primary Care Partnership scheme (PCPS). This would result in 710,000 more Singaporeans being eligible for subsidised primary healthcare at private GPs and dentists under the scheme.

RMG has proven itself in the last downturn, registering strong revenue and profit growth amid the recession. We believe that it would once again demonstrate this resilience. Some of the possible threats are (1) Appreciation of S$ making medical cost more expensive for foreign patients; and (2) Increasing staff cost pressure for medical workers. We believe that such issues are manageable and ultimately, positive structural factors would still provide a strong support for the growth of the healthcare sector in the region.

Action & Recommendation

RMG is trading below its 3-year historical mean PER of 24.1x. Reiterate BUY with target price maintained at $2.80 based on our DCF valuation model. Implied FY12F PER is 27x. We continue to like the company for its resilient business and strong operating cash flow.