Healthcare Sector - OCBC Investment 2016-12-08: Opportunities Remain Amid High Valuations

Healthcare Sector - OCBC Investment 2016-12-08: Opportunities Remain Amid High Valuations Singapore Healthcare Sector RAFFLES MEDICAL GROUP LTD BSL.SI

Healthcare Sector - Opportunities Remain Amid High Valuations

  • The FTSE ST Health Care Index FSTHC lost its gains.
  • Growth story intact for most.
  • Staying neutral on the broader sector.

Mixed performance; valuations remain high 

  • The FTSE ST Health Care Index (FSTHC) reaped rewards for most of the year but lost its gains to hit a YTD decline of 0.9% vs. the benchmark STI’s YTD gain of 2.3% as of 6 Dec. 
  • Selected healthcare stocks did have a good run, often driven by M&A announcements and/or a showing of sustained earnings improvement. 
  • The secular growth trends for the healthcare sector remains intact, warranting healthcare stocks a certain premium but valuations still tend to run high, especially for Singapore when compared to the MSCI Asia ex Japan Healthcare Index.

In the face of strong competition between private and public sector… 

  • As governments in the region improve healthcare infrastructure and efficiency, competition could remain strong between private and public sector. 
  • Medical tourism growth may also slow down amid heightened macro uncertainties for the region.

…Healthcare providers are adopting similar growth strategies 

  • With that said, private hospitals for instance, often target the premium segment of patients and most are still executing capacity expansion plans in their home countries as well as overseas, suggesting that confidence remains towards the scope for growth. 
  • For the smaller healthcare services providers, while acquisitions made are often earnings accretive, we note that these are immediate effects and thus would also prefer if the synergies to be gained are clear post-acquisition as it would offer clearer visibility on growth sustainability in the longer run.

Varying growth trajectory for companies within the sector 

  • In the nearer term, given the start-up cost pressures from expansion projects, all eyes would be on earnings performance as well as corporate developments. 
  • We are keeping our NEUTRAL stance on the healthcare sector given the high valuations and varying growth trajectory across the companies. 
  • We upgraded Raffles Medical Group (FV estimate: S$1.61) from hold to BUY on 24 Nov following a dip in share price, for its steady earnings track record, strong management execution, healthy balance sheet and visibility on long term growth driven by a pipeline of expansion plans (Hospital extension next year and Shanghai Hospital by end 2018).

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2016-12-08
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.610 Same 1.610