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

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.

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

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 .

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