Raffles Medical Group to be hit by higher staff cost

The government proposes a 20% salary increase for healthcare professionals by 2014 - will RMG offset higher staff cost with a price increase?

The move to keep its staff and attract more workers will likely lead to price increase.

Meanwhile, Mount Elizabeth Novena Hospital opens with 180 beds next month. How will the Raffles Medical Group be affected?

Here's more from Maybank Kim Eng Singapore:

Cheapest hospital stock now. The recent dip in share price has resulted in Raffles Medical Group emerging as the cheapest hospital stock in the region.

Premium valuations intact. Despite the recent sell-off in equity markets, hospital stocks have managed to hold on to their premium valuations, trading at above-market average PERs of about 26x. Aside from defensive earnings, anticipation of renewed interest in the healthcare sector could have provided stock support, in the hope of a positive re-rating in valuations for the sector.

No competition from Novena suites. Parkway Pantai’s 333-bed Mount Elizabeth Novena Hospital is expected to open next month with 180 beds operating initially and the rest to come on-stream by the end of the year. Though this marks one of the biggest increases in private hospital beds in more than 10 years, there's no major negative impact on RMG as the new hospital targets the high-end segment of the market.

Cost containment manageable. RMG’s greatest challenge lies in managing staff cost, which is estimated at 48% of its total revenue. The Singapore government intends to increase healthcare professionals’ wages by an average of 20% by 2014. RMG would need to respond correspondingly with a competitive compensation structure to retain and attract staff. Nevertheless, it still has room to raise its charges and intends to do so, given that its average surgical cost is lower than that of Singapore General Hospital, a public hospital.

Strongest balance sheet. RMG has the strongest balance sheet among its peers, being the only one in a net cash position. Even after accounting for capex for its expansion plans, it is expected to remain in a net cash position, helped by its strong operating cash flow generating capability.

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