OCBC Investment Research has maintained its ‘Overweight’ rating on the healthcare sector, with a preference towards healthcare service providers, and Raffles Medical Group is its top pick. Meanwhile, Maybank Kim Eng has maintained its 'Overweight' rating on the offshore and marine sector, and SembCorp Marine is its top pick.

Loo-Choon-YongExecutive chairman and co-founder of Raffles Medical Group, Dr Loo Choon Yong. Company photoRaffles Medical is top healthcare pick

Analysts: Andy Wong and Carey Wong, OCBC Investment Research

Private hospital revenues for the Asia Pacific region is expected to increase at CAGR of 23.5% to US$1,086 billion over 2012 to 2017, according to Frost & Sullivan.

This growth is likely to be sustained, given an aging population, increasing disease burden, rising affluence and the growth of medical tourism.

Sector Positives:

>> Greater demand for cross border medical services given the lack of healthcare infrastructure and quality doctors in their home countries.

>> Strong positive correlation between affluence and the take-up of private healthcare services, especially in countries with long waiting times in the public sector such as Singapore.

>> An increasing penetration of private insurance coverage encourages people to use private healthcare services despite rising medical expenses.

Sector Risks: Competitive pressures and rising staff costs.

Revenue for Raffles Medical Group (RMG) rose 10.7% (excluding non-recurring recognition of sale of medical suites), while core earnings was up 14.0% for 9MCY13.

RMG has wide network of clinics and a full-fledged hospital with 200-beds, offering a diverse spectrum of medical services.

This year, it signed a non-binding Letter of Intent and a framework agreement to develop two integrated international hospitals, one each in Shenzhen and Shanghai.

The deal allows RMG to tap on the growing Chinese healthcare market.

It expects to pump about S$400 million into the deal.

As at 30 Sep 2013, it was in a healthy net cash position of S$141.7 million.

It will also receive gross proceeds of S$120 million in 4Q2013 from the sale of its Thong Sia commercial podium.

While start-up losses are inevitable for greenfield projects (and hospitals typically take 3-5 years to achieve breakeven), we see it as necessary in order to capture future growth opportunities.

Our top sector pick is RMG [BUY; Fair Value: S$3.61].




400_semi-subWest Led, a semi-submersible oil rig built by SembCorp Marine for Sea Drill delivered last year. Company photo

SembCorp Marine is top offshore pick

Analyst: Yeak Chee Keong, CFA, Maybank Kim Eng

In our view, the rig building industry is in the midst of a multi-year up-cycle.

Strong demand for shallow-water jackups is already evident, and US drillers such as Transocean have started to upgrade their fleet.

According to Wood Mackenzie, at least 95 additional deepwater floaters are needed from 2016 to 2022 to exploit discoveries in deepwater.

We project a return in deepwater floater orders (particularly semi-submersible rigs) from 2014 based on the following trends:
(1) Utilisation rates have breached 90%
(2) Dayrates are rising
(3) Only four semisubs are to be delivered beyond 2016

Our top sector pick, Sembcorp Marine (SMM), should benefit from flow-over orders in view of tight yard slot availability at Keppel Corp (KEP).

We prefer SMM to KEP because the former offers
(1) pure-play exposure
(2) a stronger three-year EPS CAGR of 13.5%
(3) an attractive FY14F P/BV of 2.9x (mean 3.6x, -1SD 2.5x).

We expect SMM’s margins to recover in FY14F, underpinned by
(1) More high-margin ship repair jobs (~SGD600 to SGD1.2b in FY14)
(2) An uptrend in average price of rig contracts secured
(3) Efficiency gains from repeat execution

[Buy SMM; Target Price S$5.50.]

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