Raffles Medical: Putting In Place Building Blocks Of Growth
(BUY, SGD3.06, TP: SGD3.61)
RFMD will be acquiring the land adjacent to its Raffles Hospital to expand the latter’s facilities. It also recently bought a building with a view of expanding its healthcare services. Both acquisitions, to be funded internally owing to the group’s robust balance sheet and operating cash flow, will boost revenue growth in the long term. Upgrade to BUY, with our DCF-derived TP at SGD3.61.
Buys adjacent land for SGD105.2m. RFMD plans to build an extension of its hospital on this piece of land, which will potentially extend and enhance its existing facilities. Including construction and improvement works, the total cost of expansion is estimated at SGD310m. Construction, expected to commence in 2Q14, will last for 24 months.
Acquires 100 Taman Warna for SGD54.8m. The group also plans to redevelop this building into a 5-storey commercial building comprising five levels above the ground, one basement level and two levels of basement carparks. The redevelopment cost, including development premium, stamp duty and property tax, is expected to amount to SGD65m. It expects to obtain the temporary occupation permit (TOP) in 1Q16.
Confident on current environment. RFMD’s growth had previously been constrained by its capacity. As there is strong demand for healthcare services in Singapore, the group is now expanding capacity, which we think is a step in the right direction. Its planned extension will help to strengthen Singapore’s position as a medical hub and contribute to medical tourism growth. Given its strong balance sheet (SGD141.7m net cash as at end-3Q13) and stable cash flow generation, management is confident that RFMD would not need to borrow for the two projects, and would still be able to pay steady dividends to shareholders. Both projects are expected to contribute from 2016.
Lifting TP to SGD3.61; upgrade to BUY. RMFD’s outlook is positive while its patient volume is still healthy. The group’s pricing remains 20% below its competitors’ on average, which indicates that there is room for revenue growth. As such, we roll forward our earnings and raise our DCF-based TP to SGD3.61.
Publish date: 27/01/14