• Share price declined post results
• No change to estimates
• Opportunity to accumulate shares

Management looking to improve efficiency

Raffles Medical Group’s share price has since tumbled 16.6% from its 52-week high of S$4.99 in July, or by 5.2% post 3Q results. The marginal 1.2% increase in 3Q PATMI was a tad below our expectations, and this was due to higher staff costs, depreciation costs and operating lease expenses. But we acknowledge that this is inevitable, given the group’s capacity expansion plans.

These plans include the new medical centre at Shaw Centre that was opened in 2H15 as well as the Holland Village project. Nurses and staffs have to be trained before the new centres are opened, thus expenses have to be incurred before any meaningful revenue contribution. 4Q should see some revenue contribution from the Shaw Centre facility; and it is usually their strongest quarter.

Looking ahead, we remain cognizant of the cost pressures from all fronts, while management is focused on striving to achieve higher operational efficiency.

Not all is lost despite risk of flagging medical tourism

Although the group had witnessed a lower volume of foreign patients from countries like Indonesia and Russia, we understand that they saw higher intensity cases such as their bone marrow transplant programme. Thus, while there is the risk of some patients choosing other hospitals for cheaper cost of treatment, we note that RMG still serves a premium segment of patients, and such specialized treatments enable them to remain a strong contender against their regional competitors. Nonetheless, diversification also remains important, and RFMD has been doing so with its new centre in Japan and the acquisition of International SOS (MC Holdings) Pte Ltd.

Not expensive relative to peers

We previously noted that longer-term investors could look to accumulate the group’s shares below S$4.36, thus we think value has reemerged with the recent share price correction. Its current valuation at 30.4x FY16F earnings does not look expensive relative to their healthcare peers; hence we upgrade the stock from hold to BUY, with no change to our estimates and fair value of S$4.59.

Source: OCBC Research - 23 Nov 2015