SINGAPORE (Sept 18): CIMB Research is upgrading its call on Raffles Medical Group (RMG) to “add” from “reduce” with a lower price target of $1.21 from $1.25 previously on the belief that the stock is looking attractive to gain exposure to the growing China healthcare market, as gestation woes have been largely priced in. 

In a report issued on Sunday, lead analyst Ngoh Yi Sin notes that the group’s share price has corrected about 27% in the year to date (YTD), which makes the stock a more attractive buy to investors in terms of risk-reward and also presents an opportunity for entry in the case of any further near-term share price weakness.

The lower price target results from accounting for start-up costs for the group’s China hospitals, which has led CIMB’s FY17-19F core earnings per share (EPS) estimates to fall by 1.3%-26.2%.

At RMG’s latest closing price of $1.10 last Friday, the counter has been trading 22.5 times CY18 EV/EBITDA, which is below its five-year historical mean of 23.2 times.

CIMB values RMG’s Singapore operations at $1.02 per share, while its Chongqing and Shanghai hospitals are valued at 12 and 7 cents per share, respectively.

According to the analyst, this means that at its current price levels, RMG investors are able to purchase a premium healthcare play in Singapore, with China exposure at a discount – and in Ngoh’s words, “almost getting the Chongqing hospital for free”.

Ngoh outlines that in the worst case scenario, RMG’s Singapore operations will be valued at 77 cents per share assuming a zero-growth rate and deteriorating pretax profit (PBT) margins.

However, she believes such an outcome is unlikely, as she is confident in the group’s steady base of corporate clients as well as its expanding network of clinics’ ability to drive organic growth. A faster-than-expected turnaround for RMG’s International SOS (ISOS) and Shaw Centre business could further boost the group’s bottom line, she adds.

“Looking beyond the start-up costs in China, we remain positive on the long-term growth prospects of RFMD’s Singapore operations, which should benefit from secular trends of an ageing population and increasing insurance penetration,” says Ngoh.

“As the number of Singaporeans aged 65 and above is expected to double to 900k by 2030, and widening insurance coverage improves affordability, we expect higher private healthcare demand, possibly mitigating a soft medical tourism outlook.”

As at 1pm, shares in RMG are trading 1 cent lower at $1.09, which is 2.60 times FY18F book value.