• Positive secular trends
• Valuations not cheap
• Await better entry point for Raffles Medical

Growth largely intact

SGX-listed healthcare companies which we track have largely reported improved financial performance during the recent 2QCY14 results season (refer to Exhibit 1). Under our coverage, Raffles Medical Group’s (RMG) 8.5% YoY growth in its 2Q14 PATMI to S$15.6m met our expectations. On the contrary, Biosensors International Group continued its lacklustre earnings trend, posting a 18.4% YoY dip in its 1QFY15 core PATMI to US$9.9m. This was its weakest performance since 4QFY10 and was also below our expectations. Other notable performers include IHH Healthcare Berhad [NON-RATED] and Q&M Dental [NONRATED]. The former saw a 20.2% YoY jump in its 2Q14 core earnings to MYR191.8m, driven by a broad-based increase in its inpatient admission volumes across its core markets (Singapore, Malaysia and Turkey). Q&M Dental’s 33.0% YoY increase in its PATMI to S$1.2m was contributed by its strong revenue growth of 27.3%.

Secular trends still positive

Looking ahead, we believe secular trends such as an aging population and better health awareness will underpin demand for higher quality healthcare services and products. According to independent research firm Business Monitor International, Singapore’s health spending is forecasted to grow at a CAGR of 8.8% from S$17.8b in 2013 to S$32.0b in 2020. Meanwhile, health spending per capita is projected to increase at a 4.3% CAGR from S$2,918 to S$3,926 during the same period. Healthcare companies have thus continued their expansion plans to leverage on this positive long-term outlook. IHH announced on 12 Sep 2014 that it had entered into a Sale and Purchase Agreement to acquire a 100% equity stake in Radlink-Asia from Fortis Healthcare Singapore for a sum of S$137m. Radlink-Asia is involved in the provision of outpatient diagnostic and molecular imaging services in Singapore. China’s recent decision to allow full foreign ownership of hospitals in seven cities would benefit RMG’s plans to expand further in China. Notwithstanding the robust secular fundamentals, we believe near-term risks to the sector include an outbreak of the Ebola pandemic, softening medical tourism receipts given the strong Singapore dollar and weaker economic growth in the region.

Downgrade sector to NEUTRAL

Majority of the stocks within the healthcare sector have performed well YTD. The FTSE ST Health Care Index (FSTHC) is now trading at a blended forward PER of 21.9x, which is close to 1.3 standard deviations above its mean 5-year forward PER. The FSTHC is also trading at a 58% premium over the STI’s blended forward PER, as compared to the average 28% premium over the past five years. In light of the rich valuations, we downgrade the healthcare sector to NEUTRAL. Our preferred pick within the sector is still RMG [HOLD; FV: S$3.90], but we believe a better entry point for the stock would be below S$3.60.

Source: OCBC Research - 16 Sep 2014