Singapore Healthcare - Maybank Kim Eng 2016-01-20: Decoupling Opportunities

Singapore Healthcare - Maybank Kim Eng 2016-01-20: Decoupling Opportunities Healthcare Q & M DENTAL GROUP (S) LIMITED QC7.SI  ISEC HEALTHCARE LTD 40T.SI  RAFFLES MEDICAL GROUP LTD R01.SI  CORDLIFE GROUP LIMITED P8A.SI 

Singapore Healthcare - Decoupling Opportunities 

■ Resilient results, but not stocks 

  • Singapore’s healthcare stocks’ earnings have been generally resilient. But in uncertain markets, their stock performances correlate more with the broader market, diverging temporarily from their fundamentals. 
  • Current short-term weakness caused by market weakness and stake reductions by institutional investors could present buying opportunities, in our view. 
  • Our top picks are Raffles Medical, ISEC and Q&M with catalysts expected from further expansions and M&As. 
  • We downgrade Cordlife to HOLD, as it has rallied significantly since our Six-for-16 strategy report dated 4 Jan 2016
  • Our SOTP-based TP already takes into account shareholding changes that could lead to a privatisation or other forms of corporate developments. 

■ Short-term weakness… 

  • We think that Street and our expectations for FY15 could be missed by 5- 10%, as Raffles Medical and Cordlife could book higher-than-expected start-up costs from their major expansion. 
  • Also, both could have been affected by weaker demand last year, as Raffles Medical still heavily relies on Singapore and Cordlife’s products are discretionary. 
  • Also, Raffles Medical and IHH could be sold down after their institutional-fund investors trimmed stakes in the companies. 
  • Fidelity reduced its position in Raffles Medical to < 5% on 8 Dec 2015. Aberdeen, which owns a 5.4% stake, has reduced this to 4.9%. (It has also cut stakes in other listed companies: Venture > 20% to 8% and CityDev, 22% to 11%). 
  • On the other hand, smaller-cap Q&M and ISEC are being supported by share buybacks from the companies themselves and major shareholders 

■ …but multiples should be sustainable 

  • We think that the sector’s > 30x FY16 P/E valuations remain justifiable, as the companies have good expansion plans, earnings resilience, strong cash flow and healthy balance sheets to fund growth. 
  • For instance, ISEC completed an EPS-accretive acquisition in Malaysia in Dec 2015. 
  • Q&M completed two in Singapore in Sep 2015 and one in Dec 2015. 
  • In addition, we note that Raffles Medical’s and Q&M are now trading at 20% discount to Asia peers, at 30x FY16 P/E . 

■ Catalysts 

  • We believe that investors could start looking at beaten-down stocks that have corrected more than the STI’s -28% from its 52-week high: 
    1. ISEC HEALTHCARE LTD. (40T.SI), down 57% from its 52-week high, is in the early stages of its M&A spree and is the cheapest by P/E among peers. 
    2. Q & M DENTAL GROUP (S) LIMITED (QC7.SI), down 31% from its 52-week high, offers 60% EPS growth for FY16, supported by profit guarantees. 
    3. RAFFLES MEDICAL GROUP LTD (R01.SI), down 21% from its 52-week high, is aggressively expanding in China, with the help of its execution track record. 
  • Risks are poor project execution or M&A delays, potentially caused by Chinese regulations.


John Cheong CFA Maybank Kim Eng | Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-20
CIMB Securities SGX Stock Analyst Report BUY Maintain BUY 5.22 Same 5.22
HOLD Downgrade BUY 1.72 Same 1.72
BUY Maintain BUY 0.97 Same 0.97
BUY Maintain BUY 0.40 Same 0.40