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.

ST Engineering (STE SP) – Senior manager arrested, released on bail. Negative for sentiment. (KimEng)

Previous day closing price: $2.84

Recommendation – HOLD (maintained)

Target price – $3.15 (maintained)

ST Engineering (STE) has announced that one of its senior personnel was arrested by the Corrupt Practices Investigation Bureau. Patrick Lee Swee Ching, currently Chief Financial Officer of US subsidiary of Vision Technologies Systems, was released on bail and has been granted permission by the CPIB to leave Singapore. He returned to the US on 10 September 2011 to resume his responsibilities as the Chief Financial Officer of VT Systems. The arrest is believed to stem from the time when Mr Lee was the Group Financial Controller for ST Marine.

It is believed that the CPIB is investigating certain transactions involving two former and one current employees of ST Marine, who were also arrested by the CPIB and released on bail. STE declined to provide further details at this time as the CPIB’s investigation is ongoing, but has also commissioned an internal inquiry.

The Penal Code that Mr Lee was charged with relates to an officer who destroys or falsifies documents 'wilfully and with intent to defraud', but no details were provided on the type of accounts that were being investigated. However, Mr Lee left ST Marine in 2006 to join VT Systems.

While we are short on details, the severity of the offence not known, but we note that Mr Lee was allowed out of the country, and the alleged offence took place at least five years ago. We will keep abreast on this situation, but it will be a negative overhang to STE’s stock price for now. Maintain Hold.

Wilmar Int’l Ltd - Proserpine deal not sour yet (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$5.17

Fair Value: S$5.68

Maintains offer for Proserpine. Wilmar International Limited (WIL) announced yesterday that its Australian subsidiary Sucrogen has signed an agreement with Proserpine Cooperative Sugar Association (Proserpine) to maintain its offer to purchase the latter's business assets and continue its financial support to Proserpine. As a recap, Sucrogen originally planned to acquire the business assets of Proserpine for A$115m (S$151m) on a "debt-free and cash-free" basis; but the amount could rise to A$118m including completion adjustments. The move would boost Sucrogen's milling capacity by 2m tonnes to 17m tonnes. It will also increase the sugar giant's raw sugar production by 10% to 2.2m tonnes. In addition, it will increase its presence in the Mackay central region, where it already has operations in raw sugar production, sugar refining, ethanol and liquid fertilizer production.

Cites "strong support" from Proserpine. Sucrogen says the decision for maintaining its offer was undertaken after receiving continued strong support from the majority of Proserpine members. This as Sucrogen had earlier only managed to obtain 70% of the required 75% of Proserpine's members to vote in favour of the offer. Sucrogen has now agreed to Proserpine members to having a second opportunity to vote on its offer in Oct 2011. However, we note that even the extension of the offer is not a certainty that Sucrogen will be successful. According to a recent Dow Jones Newswire report, Tully Sugar Ltd, a unit of Chinese state-owned Cofco Corp, is also keen to progress its previously stalled A$120m takeover offer. But Sucrogen believes that its offer will result in a quicker, more certain outcome as it has already obtained the necessary regulatory approvals; this means that it is ready to complete the transaction immediately following member approval as opposed to rival offers.

Good strategic fit. As before, we think that Proserpine would be a good strategic fit for Sucrogen. Besides increasing its capacity, we note that the move will also add to its capabilities; this as Proserpine has recently invested in facilities to manufacture and market furfural, which is a globally traded industrial chemical used in solvent extraction, foundry resins and pharmaceuticals. Last but not least, Sucrogen believes that there is great potential in the region for expansion of the cane-growing area.

Maintain HOLD with S$5.68 fair value. But even if Sucrogen is successful, we are unlikely to see any immediate boost; any meaningful impact will only be felt in mid-FY12. Nevertheless, we expect WIL to be able to comfortably finance the acquisition with internal resources and debt. Maintain HOLD with S$5.68 fair value. We would still be buyers closer to S$5.00.