RMG sale of 30 Bideford Road likely to fund expansion

Rather than special dividends, says OCBC.

Raffles Medical Group is looking to sell its commercial podium near Orchard Road, and OCBC Investment Research believes the proceeds from this sale will likely be used for its expansion plans in favor of a special shareholders dividend.

Here's more from OCBC:

Seeking to sell its commercial podium near Orchard Road. Raffles Medical Group (RMG) recently engaged real estate services firm Jones Lang LaSalle to advise and manage the sale of its freehold seven-storey commercial podium located at 30 Bideford Road. This would be done via a tender process, which closes on 15 Jul. RMG’s decision to sell does not come as a surprise to us, as we had previously flagged the sale of the property as a viable option after its re-application for change of use to a medical centre was unsuccessful. As a recap, RMG completed the purchase of the 42,668 sf building for S$92.08m in Apr 2011. The latest independent valuation of the property was S$98m as at 31 Dec 2012, representing a 6.4% premium to its purchase price. We expect management to utilise the sale proceeds for its expansion plans rather than pay out a special dividend to shareholders. Investment outlay for its  Raffles Hospital extension and possible Shenzhen hospital (non-binding Letter of Intent signed) is estimated to amount to S$80-130m and S$150m, respectively (capex to occur in stages).

Enhancing productivity via digitalisation of medical records. Operationally, RMG is seeking to implement a new Hospital Information System and Electronics Medical Records System. We believe this would enhance RMG’s efficiency and improve the quality of delivery of its healthcare services as patients’ records can be easily shared between doctors, nurses and other ancillary services departments. The targeted completion for the implementation is by year end.

Value has re-emerged, upgrade to BUY. RMG’s share price has fallen 16.5% from its peak attained on 11 Apr this year, far more drastic than the 3.7% dip by the STI during the same period. This is despite the fact that RMG remains on track to achieve a core EPS CAGR of 12.7% from FY12-14F, while offering FY13F ROE of 14.9%. As we now roll forward our valuations to 29x blended FY13/14F EPS, we derive a higher fair value estimate of S$3.42 (previously S$3.22) on RMG. We believe that value has re-emerged for RMG following its sharp share price correction, and thus upgrade the stock from Hold to BUY.