3Q13 results slightly-below expectations. This was a relatively soft quarter by the company’s consistent standards, though we expect improvements next quarter. The company continues to position itself for overseas expansion to complement its organic growth plans in Singapore. Based on latest discussions with management, we expect to see concrete positive news flow by year-end, which may support a re-rating of the stock.

Revenue weakness likely to be temporal. On the surface, 3Q13 topline growth of 8% yoy was worryingly weakest since 3Q09, in the depths of the financial crisis. Both the hospital services and healthcare segments were lacklustre. This was attributed to two main reasons; 1) A higher than normal number of specialists on leave/ attending conferences during the quarter, which should self-correct in 4Q and 2) Cessation of the long-term government prison contract, which if excluded, group revenue would have been up a respectable 12% yoy.

Pushing ahead into China. Management also elaborated on their thinking on the recent 12 Sep 2013 announcement with Shanghai Lujiazui, to collaborate on a Greenfield hospital in Pudong. This project is similar in nature to the earlier agreement with China Merchant Group, whereby Raffles will be the operator and majority shareholder. Both projects can be executed concurrently. This fits into the overall strategy of targeting “gateway” cities in China.

Sufficient cash to support all its plans. Management expects the proceeds from the sale of Thong Sia Building (est SGD120m) to boost its current net cash position of SGD142m. Together with healthy cash flows, we estimate the company will have no problem funding the two China projects and Raffles Hospital expansion which is still expected to start within the next two months.

Maintain BUY. We adjust our FY13-FY14F estimates marginally downward by 2%, but keep our DCF-based TP of SGD3.80 unchanged. This implies 29.7x FY14F, which is comparable to Asian-listed peers. We believe the stock deserves a re-rating as overseas expansion plans become more concrete over the next 12 months.

Source: Maybank Kim Eng Research - 29 Oct 2013