Healthcare Sector - OCBC Investment 2016-03-08: Mixed 4Q performance across sub-sectors

Healthcare Sector - OCBC Investment 2016-03-08: Prospects remain healthy for most RAFFLES MEDICAL GROUP LTD R01.SI  BIOSENSORS INT'L GROUP LTD B20.SI 

Healthcare Sector: Mixed 4Q performance across sub-sectors 

  • Gestation costs will hit initially 
  • Long term prospects remain intact 
  • Selective as valuations not attractive 

Some healthcare providers hit by expansion-driven costs 

  • For Raffles Medical Group, results were within expectations with an 11.6% YoY increase in its 4Q15 PATMI to S$21.3m, and expansion projects are still on track. However, IHH Healthcare Berhad’s 4Q15 core operational PATMI decline of 11% to RM177.0m presented a case of profit erosion from inevitably higher financing and depreciation expenses due to the acquisition of Global Hospitals and new hospitals. 
  • Similarly for Q&M Dental Group, its revenue growth was not enough to compensate for the drag by finance costs in 4Q, which had increased due to the acquisitions. As a result, 4Q15 PATMI declined 40% to S$2.1m. Nonetheless, there should be meaningful upside from these expansion plans especially after the ramp-up phase, if successful cost management is in place as well. 

Mixed results for other sub-sectors 

  • Amid Biosensors International’s amalgamation process, the company’s recently released 2Q and 3QFY16 results showed no signs of pick up. 9MFY16 net profit was 24% lower at US$15.0m, due to continuous ASP erosion, lower licensing revenue, negative FX and soft sales in China. 
  • On QT Vascular, core losses had actually narrowed for the full year, excluding the prudent provision of US$23.4m for legal procedures. But we think its share price may enjoy a relief only when the legal process finally concludes. 
  • On the other sub-sectors, we note that glove manufacturing players UG Healthcare and Riverstone continued to perform well. Notably, the latest 1HFY16 results by UGHC provided a clearer picture without the effects from IPO expenses incurred last year. Revenue growth of 20.1% YoY was mainly supported by volume growth as ASP of gloves has been declining across its industry, while PATMI rose 34% to S$3.2m. Besides plans to expand production capacity over the next two years, the company is making steps into better-margin surgical gloves in emerging markets where bigger players have not dominated yet. 

Still neutral 

  • With the announcement of an overhaul for Singapore General Hospital (SGH) over the next two decades, the local healthcare sector continues to offer vast potential for development in terms of public-private partnerships as well as faster pace of adoption of healthcare related technology. 
  • The long term prospects for local healthcare providers remains clear. 
  • Following the outperformance of the FTSE ST Health Care Index (FSTHC) in 2015, the pace however has slowed for FSTHC, gaining only 1.4% vs. the STI’s decline of 0.4% YTD. 
  • The FSTHC forward PER currently remains above its 2-year historical average, still unattractive on a broad-based level. Moreover, with the mixed outlook across sub-sectors, we maintain a NEUTRAL rating on the healthcare sector. 
  • Raffles Medical Group [BUY, S$4.72] remains our pick.

Jodie Foo OCBC Securities | http://www.ocbcresearch.com/ 2016-03-08
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 4.72 Same 4.72
ACCEPT OFFER Maintain ACCEPT OFFER 0.66 Same 0.66