• Valuations are not sufficiently attractive
• Healthcare providers seem more defensive
• Cautious of strong competition in the sector

Mixed share price performance within OIR coverage

The FTSE ST Health Care Index (FSTHC) has been trading above its two-year historical average over the past six months, and valuations on a broad-based level do not seem sufficiently attractive. Nonetheless, FTSHC has been performing better than the FSSTI with an 8.1% YTD gain as compared to FSSTI’s marginal 0.02% YTD gain. Within our coverage, we see a mixed showing in share price performance between Biosensors International Group (BIG) and Raffles Medical Group (RFMD). BIG’s price recovery earlier in the year was believed to be mainly supported by share buybacks as it gained 18.8% YTD, while RFMD’s price movement has been largely muted.

Steadier earnings from healthcare providers

RFMD recorded decent FY14 results as revenue rose 9.9% to S$374.6m and core earnings was up by an estimated 6.7% to S$64.6m, driven by growth in both its hospital services and healthcare services segments. Looking at its peer, IHH Healthcare Berhad’s (IHH) [NON-RATED] FY14 revenue grew 9% to RM7.3b and core PATMI increased 29% to RM785m, backed by the continued ramp up of Mount Elizabeth Novena Hospital in Singapore and higher revenue intensity cases. On the other hand, BIG’s 3QFY15 earnings remained under pressure as revenue fell 6.1% YoY to US$77.5m and PATMI dipped 33.2% YoY to US$7.4m, partly due to currency depreciation.

Strong competition in sector for the longterm

The long-term outlook remains favourable for Singapore’s healthcare sector, due to supportive demographics like an ageing population as well as factors including higher insurance coverage. We continue to see substantial funding from the local government towards infrastructure development to address capacity pressures while assuring affordability of healthcare services through increased subsidies for Singaporeans. However, the on-going expansion plans by both the public and private sector would likely translate to strong competition  for the long-term. Nonetheless, we keep in mind that the private sector is also supported by foreign patients demand, and companies are expanding their presence overseas to potentially drive business growth.

Maintain NEUTRAL

We maintain our NEUTRAL stance on the healthcare sector as valuations are not sufficiently attractive and we expect competition in the sector to remain strong. Under our healthcare sector coverage, we have a HOLD rating on RFMD with S$3.91 fair value estimate as a lack of near term catalysts puts a cap on upside potential, though the counter has positive long-term growth prospects. While BIG [SELL, S$0.60] showed an inkling of improvement in its 3QFY15 operating margin, we look to see if the cost reduction initiatives taken are sustainable, and we await further progress in approvals for its medical devices.

Source: OCBC Research - 18 Mar 2015