Raffles Medical Group operations holding up, special dividend possible

See why medical tourism receipts remain resilient.

Despite the weakening of the Indonesia Rupee currency, medical tourism receipts from foreign patients has not been badly hit, reports Raffles Medical Group (RMG) to OCBC.

This led the market research firm to conclude that most foreignt patients flock to RMG to treat for acute illnesses with little regard for higher costs. And while RMG might suffer from delays in elective surgeries done among patients due to higher costs, the company could make up for it by boosting its market share as it attract clients from more expensive Singapore rivals.

OCBC also views a possible special dividen or a higher ordinary final dividend payout after it raises cash from the Raffles Medical Management disposal.

Here's more from OCBC:

Concerns over weakening IDR overdone. Raffles Medical Group’s (RMG) share price has fallen ~5% since the start of Jul, and we believe this may have been caused by concerns over the impact of the weakening IDR on RMG’s Indonesian patient visits, coupled with the broad market weakness. RMG updated us that it has not felt any significant effects of this on its medical tourism figures. We believe this is because a large proportion of its foreign patients come to RMG for the treatment of more acute illnesses. Demand for these cases tends to be more price inelastic in nature. However, there could still be some negative impact on elective surgeries done, in our view, as patients may choose to delay such procedures. A mitigating factor could be RMG’s competitive pricing vis-à-vis its local peers, which may allow it to capture some market share from its competitors for foreign patients who decide to proceed with their treatment but prefer a cheaper alternative in Singapore without compromising on quality.

Sale of property to bolster cash pile. Raffles Medical Group (RMG) recently entered into a sale and purchase agreement for the disposal of Raffles Medical Management (which owns the Thong Sia commercial podium) for S$120m. This represents a 30.3% and 22.4% premium over its purchase price (acquired in Apr 2011) and latest valuation (as at 31 Dec 2012). Proceeds would be used for RMG’s expansion plans as it is negotiating on a collaboration for a possible integrated international hospital development in Shenzhen, China, which requires ~S$150m of capex (spread over three years). We also do not rule out the possibility of RMG paying a special dividend or increasing its ordinary final dividend payout as a means of rewarding its shareholders.

Reiterate our BUY rating. RMG would recognise a net gain of ~S$21.4m upon the completion of sale of this asset (expected on 31 Oct 2013), which would boost its earnings for FY13. However, this does not affect our valuations on the group as we view the gain as a non-recurring item. We maintain our BUY rating and S$3.42 fair value estimate on RMG.

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