This is what the healthcare sector must dodge in the next quarter

Fat cashflows may be at risk.

According to OCBC, during the recently concluded 3QCY12 results period, both healthcare companies under our coverage continued to deliver YoY revenue and core earnings growth.

Here's more from OCBC:

Biosensors International Group (BIG) reported core PATMI which matched our estimates (although revenue missed), while Raffles Medical Group’s (RMG) earnings came in a tad below our expectations (but revenue was in line).

Both BIG and RMG also generated healthy free cashflows of US$19.2m and S$13.1m, thus ending the quarter with net cash of US$331.7m and S$68.7m, respectively.

In light of the ongoing vagaries of the macroeconomic landscape which includes the looming US ‘fiscal cliff’ and persistent eurozone issues, we believe that RMG [BUY; FV: S$2.82] offers an investment merit for investors given its high quality defensive earnings.

In our view, RMG’s recent share price weakness is likely due to the overhang over its application for the change of use of its commercial podium at 30 Bideford Road for medical clinics, which was rejected by URA.

Nevertheless, management is working closely with the relevant authorities to address their concerns, and we are optimistic on both parties reaching a resolution, which could provide a re-rating catalyst for the stock.

We maintain OVERWEIGHT on the Healthcare Sector, as fundamentals remain solid, although margin pressure from rising staff costs (healthcare service providers) and price cuts (medical device companies) remains as the main downside risk.

We are still positive on BIG [BUY; FV: S$1.69], which we retain as our preferred pick within the sector. With the stock trading at 11.0x FY14F PER (more than 1.5 standard deviations below its average 3-year forward core PER), we opine that the market has more than priced in concerns over stent price cuts in certain countries which it is operating.

BIG continues to capture market share away from its competitors, which we attribute to the superiority in its stent technology. BIG also initiated its first ever share buybacks from 8 Nov 2012 (8.05m shares purchased since at an average price of S$1.10). We believe that management is sending a clear signal that it sees value at current price levels.

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