Raffles Medical Group - Recession and Dr. Feelgood (CIMB)

OUTPERFORM Maintained

S$2.04 @12/09/11

Target: S$2.64

Hospitals

• Private healthcare fares better in recessions. RFMD’s hallmark has always been its ability to drive operating efficiencies that result in strong margins and profitability. We believe should a recession happens, it will do little to derail this, given: 1) that its market is somewhat sheltered from discretionary healthcare spending; 2) government aid for businesses in past recessions; and 3) the greater participation of private healthcare providers to lighten the burden of an overloaded public healthcare system. Our earnings estimates and target price of S$2.64 are intact, set at 23x CY12 P/E, its mid-cycle valuations. We expect stock catalysts from the addition of clinics, expansion of medical specialties, and higher-intensity cases in its hospital.

• Increasing role for private healthcare providers. While Singapore's tertiary, hospital-based specialist healthcare is highly developed, its general rehabilitative or supportive community healthcare remains underdeveloped. But the imbalance is being addressed. Increasing public dialogues also signal to us the government’s growing emphasis on the participation of private healthcare operators in lightening the burden of an overloaded public healthcare system. RFMD, with its extensive primary care network, should benefit from pilot test schemes being rolled out.

• Seeing is believing. Among our first few observations during our recent visits to RFMD’s flagship Raffles Hospital were the huge crowds, whether during a weekday or a Sunday morning. This leads us to conclude that despite a general belt-tightening mood among the populace, healthcare consumption has not slowed. We also noted that the average bill for outpatient consultation was not cheap, north of S$200 which includes consultation with a senior doctor in the exclusive Raffles Executive Medical Centre.

Private healthcare fares better in recession

RFMD’s hallmark has always been its ability to drive operating efficiencies that result in

strong margins and profitability. We believe a recession will do little to derail this. Given its broad spectrum of healthcare services from primary to tertiary curative medical care, and from neighbourhood clinics to medical centres and a city hospital, RFMD’s market is somewhat sheltered from discretionary healthcare spending, we believe.

The Singapore government usually grants aid to businesses to provide cost support in times of recession. In the last recession, it introduced a Jobs Credit scheme as well as lowered CPF contributions for employers. We believe these schemes play a crucial part in lowering overheads for businesses like healthcare. In RFMD’s case, close to half its revenue goes to staff-related costs, and any cost relief would be instrumental in protecting its profitability in a recession.

While Singapore's tertiary, hospital-based specialist healthcare is highly developed, its general rehabilitative or supportive community healthcare remains underdeveloped. But the imbalance is being addressed, with increased resources for home-based medical and nursing care, and voluntary welfare organisations running community hospitals, hospices, day-care centres and ambulatory care services. Increasing public dialogues also signal to us the government’s growing emphasis on the participation of private healthcare operators in lightening the burden of an overloaded public healthcare system. This implies that healthcare operators like RFMD, with its extensive primary care network, will benefit from pilot test schemes being rolled out.

Bills not cheap; seeing is believing

We have often assumed that patient admissions are the primary source of RFMD’s revenue intensity. Among our first few observations during our recent trips to Raffles Hospital were the huge crowds either on a weekday or a Sunday morning. This leads us to conclude that despite a general belt-tightening mood among the populace, healthcare consumption has not slowed.

We also noted that the average bill size for outpatients is not exactly small, north of S$200 per bill which includes consultation with a senior doctor in the exclusive Raffles Executive Medical Centre. Recurring healthcare services in the form of laboratory tests and pharmacy services contribute nearly 80% of the group’s revenue, we calculated, in our outpatient exercise. This implies that its overall healthcare segment is churning out respectable revenue, despite threats of a recession.

Valuation and recommendation

Maintain Outperform. We are keeping our earnings estimates and target price of S$2.64, set at 23x CY12 P/E, its mid-cycle valuations. With its defensive business that delivers consistent earnings, we maintain Outperform. We continue to expect stock catalysts from the addition of clinics, expansion of medical specialties, medical fee hikes, and higher-intensity cases for its hospital segment.