Healthcare Sector

DBS VICKERS SECURITIES on 7 March 2012

THE Singapore health minister unveiled a healthcare roadmap in Parliament yesterday, focusing on three goals: 1) Singaporeans to receive health care when needed; 2) healthcare services will be of good quality and effective; and 3) such services will be affordable to Singaporeans.

To achieve the above objectives, the government will be increasing hospital beds and manpower. These are: a) addition of 3,700 hospital beds by 2020; b) addition of 20,000 healthcare workers (+50 per cent) by 2020 and; c) lease capacity from private healthcare operators, namely Parkway East Hospital and Raffles Hospital, to treat subsidised patients, to ease the tight capacity in the short term.

Raising healthcare workers remuneration by 20 per cent. A new salary framework will be introduced to retain manpower in the public sector. On average, healthcare workers' total compensation will increase by about 20 per cent by 2014, with the first adjustments by April 2012. The measures to lease beds/capacity from private hospital operators will be positive in terms of operational utilisation, and could create some initial euphoria in share prices of private healthcare operators.

However, the financial metrics of how this will be done are still being ironed out. For example, patient charges, level of subsidies to be provided by the government, and the level of take-up rates (if based on patients' preference), etc.

Furthermore, we believe there is a limit to the number of beds each operator is able to lease to the public sector given that this could compromise its service level if the public partnership saps too much resources.

Fight for manpower issues a longer term challenge: With the increase in public sector remuneration, the bar by private operators to attract healthcare workers is likely to be raised. This comes at a time when capacity is increasing in the private sector. These are Parkway's Mt Elizabeth Novena Hospital, Singapore Health Partners' Connexion One (at Farrer Park), Adam Road Hospital by Fortis Healthcare, and Raffles Medical Specialist Medical Centre at Bideford Road and 30 per cent increase in GFA at its hospital.

Essentially, both public and private healthcare sector will need additional manpower resources. Staff cost accounts for about 49 per cent of revenue at Raffles Medical.

Maintain hold on Raffles Medical. Despite some near-term boost from the public partnership to lease beds, the details are yet to be finalised and the financial impact is uncertain. Over the medium term, the challenge lies in managing costs, namely manpower.

As Raffles Medical is trading at about 22.2 times FY12F price-to- earnings (P/E), above its mean of 21 times and 60 per cent premium to the overall market, we believe the valuations have already factored in the positive outlook. Our target price stays at $2.48, based on 24 times FY12F P/E, a +0.5 standard deviation above mean.

Singapore Airlines

PHILLIP SECURITIES RESEARCH on 7 March 2012

THE Singapore Airlines (SIA) Group comprises three main business segments: passenger, cargo, and aviation MRO (maintenance, repair, and operations) services. The parent company, SIA, operates more than 100 aircraft to a global network of destinations.

Tiger Airways announced plans to set up a second base in Sydney, with operations expected to commence from early July 2012.

Sector limits imposed by CASA would also be gradually lifted and Tiger Airways Australia (TAA) would be able to operate to a maximum of 64 (current: 38) sectors per day from October 2012. Previously, SIA also announced an increase in fuel surcharge of US$2-28 per sector for flights on SIA & SilkAir and SIA Cargo's freighter capacity would be reduced by 20 per cent in response to weaker demand.

The developments are positive for Tiger Airways. We also think that the establishment of a second base by TAA in Sydney could have strategic implications to SIA's new long-haul budget carrier, Scoot.

Scoot previously announced that they would fly to Gold Coast & Sydney from mid-2012. Hence, we believe that there is potential for development of a budget network for SIA and its affiliates, with Tiger Airways and Scoot collaborating for traffic feed into each other's network in Australia.

The codesharing scheme between SIA and Virgin Australia would provide the full service network alternative for the less budget conscious travellers.

The increase in fuel surcharge is a necessary move to combat the current high jet fuel prices (about US$135/bbl, +10.7 per cent year- to-date) and is the fifth round of increase since December 2010.

As the announced freighter capacity reduction of 20 per cent does not involve the bellyhold capacity in SIA's passenger fleet, we reckon that the effective cargo capacity reduction would probably be half.
Cargo yields could be protected with the capacity reduction. With the dynamic nature of the cargo business, we believe that a quick restoration of cargo capacity is possible, if demand unexpectedly strengthens.

We have little conviction in a near-term re-rating for SIA's stock price with the ongoing challenges facing the airline industry. However, we also see little downside for the stock price at such depressed valuations. Maintain accumulate.
ACCUMULATE

Adampak

Kim Eng on 8 Mar 2012

Background: Adampak is a manufacturer of self-adhesive labels, seals for dampening and insulating, as well as other precision die cut components. It has production facilities in Singapore, the Philippines and Thailand. In addition, it has a manufacturing presence in Malaysia and China via its associate companies.

Key products: Labels can be used to convey product information, including electrical hazard warnings, regulatory markings and bar codes used for tracking and control. Adampak also supplies die cut components such as adhesive-free zone seals for hard disk drives (HDDs), dampers, insulators and bonding tapes. Labels account for 70% of its sales and precision die cut components, the other 30%.

Waterlogged final quarter. Adampak suffered a small after-tax loss of $0.2m in 4Q11, which included $2m in impairment charges for damaged fixed assets and inventory, as well as idle production costs. December-quarter revenue tumbled by 27% YoY as sales to the HDD and telecommunications segments were affected by the flooding in Thailand last year, resulting in full-year net profit plunging by 48%.

Expecting a tough 2012. Adampak expects the HDD industry in Thailand to return to its pre-flood capacity only in 2H12. Its own production in Thailand is expected to be restarted only in April. However, provisions made in 4Q11 for flood-related costs should be written back in 2012. While its factory in Thailand was damaged, insurance money is expected to fully cover the damage.

Consider cashing out. In our November 2011 note, we gave Adampak four out of five chillies when the stock was at $0.24. It has since climbed to a high of $0.34. Valuations currently are looking fairer. Even if earnings recover back to FY10 levels, the stock will still not be as cheap as before. We were slightly disappointed that Adampak paid one cent less in dividends for FY11, even though its cash flow improved significantly.

Fraser & Neave

Kim Eng on 8 Mar 2012

Upgrade to Buy. Singapore’s mass market residential property market has proven resilient, as evidenced by the January private home sales data released by the Urban Redevelopment Authority. Developer sales in the coming months are expected to still remain strong. Fraser and Neave (F&N) is thus in a sweet spot as a healthy take-up rate of its mass market projects will provide a secure earnings stream in the next three years. We upgrade our recommendation to Buy with the target price raised to $7.55.

In the right segment. We estimate property development to account for about a quarter of F&N’s group pre-tax profit for FY Sep12F. Singapore will be the key contributor, making up 50% of development sales, with Australia and China contributing the remainder. F&N’s development earnings are secure for the next three years as its pre-sold projects in Singapore carry unrecognised revenue of $1.4b. In addition, it has a supply of 2,785 unsold private residential units as at the end of last month. We believe that monetary liquidity, low interest rates and healthy demand for mass market projects will help F&N sustain its healthy take-up rates.

China policy loosening could lift sales. F&N has about $600m in unrecognised revenue from its pre-sold units across various projects in China and Australia. It still has about 5,200 units in Australia and 8,200 units in China to be sold over the next 5-8 years. As home prices in major Chinese cities experience a reasonable decline, purchase restrictions imposed by the central government could be lifted in the medium term. If so, this would spur the sales of F&N’s residential units in China.

Capital recycling opportunities abound. Income from F&N’s commercial properties (18% of pre-tax profit) is fuelled by strong occupancy of its 11 non-REIT retail malls (2.2m sq ft) in Singapore, as well as the steadily growing serviced residence portfolio (+7,000 rooms) in Asia Pacific and the Middle East. Its hospitality and retail portfolios provide a pipeline of assets for capital recycling.

Higher target price leads to upgrade. Better-than-expected sales momentum for F&N’s residential property projects and enhanced earnings visibility prompt us to peg our target price at a lower conglomerate discount of 5% to our SOTP valuation. Our target price thus increases to $7.55 from $7.05 previously, which warrants a rating upgrade to Buy.

Singapore Telco

Kim Eng on 7 Mar 2012

Following the latest results season, we have downgraded our calls for M1 and SingTel, with margin challenges being the key pivot. Margins are likely to face downward pressure from the introduction of new handsets and mobile devices, with M1 the most vulnerable as it usually competes mainly on monthly tariffs and device subsidies. Apple, in particular, has been a bugbear given its regular launches of new phones. iPhone 4S, for instance, was launched in October last year and M1’s margins promptly took a beating in that quarter. This year, Apple is expected to introduce the iPad 3 (or rumoured to be renamed iPad HD) tonight, with Singapore availability possibly within 45 days, while iPhone 5 may come along in the third quarter, a year after the 4S. In the case of SingTel, its margins may take a further beating as it attempts to restructure its organisation to better face the data onslaught against its core voice business. However, StarHub stood out for its relative margin resilience; its mobile ARPU had in fact shown very encouraging growth. We expect this trend to continue, supported by the attractiveness of its hubbing proposition and restraint in going down the premium path to acquire customers.

SingTel (ST SP, $3.11)
Key levels
Resistance 2: $3.50
Resistance 1: $3.30
Support 1: $2.80
Support 2: $2.45
The stock has been moving sideways between $3.30 and $2.80. The overall trend is rather directionless in the weekly chart as defined by the 100- and 200-day EMA. A break of either the immediate support or resistance is needed to confirm that the stock is back into a directional trend.

StarHub (STH SP, $2.93)
Key levels
Resistance 2: $3.15
Resistance 1: $2.95
Support 1: $2.70
Support 2: $2.50
The stock has so far swung between $2.95 and $2.70 in a rather tight range. Candlesticks are trying hard to advance above the $2.95/3.00 level and a break above this area could mean more buying ahead. The $2.70 support level should attract buyers if the price pulls back. Momentum is still positive with RSI staying above the neutral level.

M1 (M1 SP, $2.48)
Key levels
Resistance 2: $2.90
Resistance 1: $2.70
Support 1: $2.30
Support 2: $2.00
The stock is falling from its peak of $2.70 (52-week high), signalling a brief pause of the bullish trend. Candlesticks are holding well above the key moving averages, suggesting the positive momentum is still intact. Watch the $2.30 (100-day EMA) support level as breaching below it would signal a possible trend reversal.

ST Engineering

OCBC on 7 Mar 2012


According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including ST Engineering’s (STE) subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. STE put out an announcement in response to the bribery scandal. In the announcement, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. According to STE, STK has never won any defence contract or exported defence sales to India. STE also has not included any expected sales to India’s MoD in its FY12 guidance and expects this blacklisting to have no financial impact on the group’s financial performance. Thus, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.

India’s bribery scandal
ST Engineering (STE) yesterday morning halted trading of its shares and also put out an announcement in response to a bribery scandal in India. According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. The MoD’s decision was based on evidence related to illegal gratification to officials, including Sudipto Ghosh, the former Director General of India’s Ordnance Factory Board (OFB).

STE maintains innocence
In its announcement yesterday, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. In fact, in all the previous court hearings and affidavits filed, the MoD repeatedly said STK was only temporarily suspended, but not blacklisted, as an arms vendor to India. The court hearings were the result of three petitions STE filed with the Delhi High Court in Mar 2011 to seek clarification on the alleged blacklisting.

No financial impact
According to STE, STK has never won any defence contract or exported defence sales to India. STE also understands that developing defence sales to India will be a long process and has not included any expected sales to India’s MoD in its FY12 guidance. Thus, the group expects this blacklisting to have no financial impact on the group’s financial performance and maintains its FY12 guidance.

Maintain BUY
Since this matter has no financial impact on STE, coupled with STE’s vigorous insistence of its innocence, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.

Health Care Sector

OCBC on 7 Mar 2012

During the recently concluded 4QCY11 results period, Raffles Medical Group reported results which were in line with our expectations, while Biosensors International Group’s (BIG) core earnings came in slightly below our estimates. Nevertheless, both healthcare companies continued to showcase healthy growth trends. During 2010, the Healthcare sector created substantial investor fervour after the privatisation of Parkway Holdings and Thomson Medical Centre at rich valuations. Looking ahead, we believe that the Healthcare sector could return to the limelight again should the high-profile IPOs of Khazanah’s Integrated Healthcare Holdings and Fortis Healthcare’s business trust materialise. This could result in a re-rating of the sector, of which RMG would be the biggest beneficiary, in our opinion. We reiterate our OVERWEIGHT rating on the Healthcare sector, underpinned by robust fundamentals. Meanwhile, BIG [BUY; FV: S$1.95] remains our top pick in the sector.

4QCY11 results review
Under our Healthcare sector coverage for the recently concluded 4QCY11 results period, Raffles Medical Group (RMG) reported results which were in line with our expectations, while Biosensors International Group’s (BIG) core earnings came in slightly below our estimates. Both companies continued to showcase healthy growth trends, although BIG’s financials were boosted by the consolidation of JW Medical Systems. For RMG, we also like its high earnings quality and opine that it is sustainable, backed by its strong operating cashflow generating ability and robust industry fundamentals.

New listings could rekindle hype in sector
Media reports have recently highlighted Fortis Healthcare’s plans to list a US$400m business trust on SGX in 2Q12, following its decision to postpone the IPO of Religare Healthcare Trust last year due to unfavourable market conditions . Another anticipated IPO could come from Khazanah Nasional’s listing of Integrated Healthcare Holdings (IHH) in 2H12, with a dual listing in Singapore and Malaysia a possibility. This could potentially raise proceeds of US$3b . As a recap, Parkway Holdings (now part of IHH) was privatised in 2010 at ~37x trailing PER (based on EPS before exceptional items). Should this IPO materialise at similar, if not higher valuations, it might provide an impetus for a re-rating of the sector.

Maintain OVERWEIGHT on Healthcare sector
In our opinion, RMG [BUY; FV: S$2.66] would likely benefit the most in the event of a sector re-rating under the aforementioned circumstances, given its leading position as a quality private healthcare service provider. We reiterate ourOVERWEIGHT rating on the Healthcare sector, underpinned by well-entrenched fundamentals such as growing affluence in the region and an aging population. Meanwhile, BIG [BUY; FV: S$1.95] remains our top pick in the sector. We see its recent share price weakness as a good buying opportunity.