UOBKH upgrades Raffles Medical Group to ‘BUY’, raises target price to $3.78

Dr-Loo-Choon-YongRaffles Medical executive chairman, Dr Loo Choon Yong. Company photoFollowing Raffles Medical Group’s announcement that its 1H2013 net profit is up 16% year-on-year at S$27.9 million, UOB Kayhian analyst Andrew Chow upgraded it to BUY (from HOLD) with a higher target price of S$3.78/share based on discounted cashflow valuation.

Analyst: Andrew Chow, CFA

Expansion works to commence by year-end
“During the analysts’ briefing, management highlighted that expansion work on its flagship hospital should commence before year-end. All the regulatory approvals have been secured and management is undertaking technical studies to ensure that disruptions to its existing operations are kept to a minimal amount.”

Large war chest for future expansion
”As at Jun 2013, its net cash balance increased to S$122.4m (S$0.22/share) compared with S$98.7m (S$0.18/share) as at March 2013. Its cash could rise further on the expected disposal of Thong Sia Building.”

Potential for special dividend
“The group has appointed Jones Lang Lasalle Property as an advisor on the sale of Thong Sia Building. RMG is likely to enjoy a significant exceptional gain given its low acquisition cost of only S$92m (S$2,158psf compared with prices of more than S$3,000psf currently). Given this, we think there is a decent potential for a special dividend. Despite the Thong Sia setback, RMG remains keen on having a medical centre at Orchard Road and is still on the lookout for potential sites. This could include an outright purchase or leasing of a suitable site. In terms of clinics, RMG has 75 clinics and plans to open another three new clinics by year-end. In the medium term, the plan is to open 3-4 new clinics per year.”

On the overseas expansion trail but proceeding cautiously
“Management is still negotiating on a potential JV with China Merchants to develop an integrated international hospital with more than 200 beds in Shenzhen, China. Other than terms with China Merchants, key considerations such as local operating conditions as well as regulatory issues need to be navigated, and management is not in a rush to conclude due diligence and negotiations. As for other markets such as Indonesia, management is not keen unless there is a liberalisation on foreign doctors working in Indonesia.”

We see upside in treatment pricing
”We understand RMG only raised hospital treatment prices by 5-6% yoy in 2012. Despite the raise, the group’s hospital fees are still at 21-37% discount to Gleneagles Hospital and Mount Elizabeth Hospital. Given the pricing differential, we see potential upside for RMG’s hospital treatments’ pricing. Management did highlight that any increases are likely to be gradual.”


Ezion adds new liftboat

Ezion-liftboatEzion is a niche operator in liftboats. Company photoDBS Vickers analyst Ho Pei Hwa recently maintained her ‘Buy’ call on Ezion, citing its strong growth profile and earnings visibility as positives. However, she trimmed its target price downward to S$2.96 (from S$3 previously), pegged to 14x FY13/14 PE.

Analyst: Ho Pei Hwa

”Ezion has signed a Letter of Intent to provide bareboat charter for a liftboat worth US$82.1million over five years. It may be converted to time charter at potentially higher contract value of about US$90 million.”

”The rig is expected to be delivered to a national oil company in Southeast Asia by late 1Q 2015.

”The cost of the newbuild - US$60 million - will be funded by the issuance of preference shares (27%) and bank borrowings (73%).

“Ezion is issuing 300 redeemable exchangeable preference shares to five Global Investor Programme Funds at an issue price of S$100,000 each to raise S$29.5m net proceeds.

“Dilution is minimal at 1.4% and would be more than offset by 1.6% earnings accretion from the new liftboat.”

Project updates

”Refurbishment of service rig #5 had been completed in May as guided, but deployment to Myanmar is impossible until the monsoon season ends in September.  Ezion is expected to absorb the bulk of lost income, which is US$2.5 million per quarter.

”Separately, the delivery of liftboat #11 under construction at a Vietnamese yard may be delayed by three months to April 2015. On a positive note, service rig #14 to Pemex is commencing operation two months ahead of schedule in July and will contribute additional US$800,000 net profit in FY2013.

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