Raffles Medical is losing Singapore Prison as client, and it's still good news

It can shrug off the prison's 4% contribution to revenue.

According to Nomura, market intelligence suggests that RFMD may no longer be the medical service provider to the Singapore Prison from Dec 12. This could actually benefit its profitability. Yes, the contract size appears huge but the economics is a lot more than meets the eye.

Here's more from Nomura:

We believe RFMD intends to rationalise its manpower and other resources to focus on chasing higher-margin healthcare businesses.

There have been murmurings that RFMD will no longer be the medical service provider to the Singapore Prison come Dec 12, when its present contract expires. The estimated value of the new contract from the Ministry of Home Affairs is roughly S$300m, for 5+3 years, starting 2013.

We do not think this is such bad news. In fact, we would applaud any such development. From a revenue-profit perspective, we think there is not much operating leverage from its previous public contract.

Actual contribution to group revenue is roughly 4%, while net contribution is less than 2.5%. We believe new branches opened in recent years have more than replaced this source of revenue.

Also, from a cost perspective,the manpower and resources spent do not favour the economics now unlike the past. With tighter restriction of the employment of foreign labour and new initiatives for expansion (new specialist centre, new wing and various new branches), management would be better off focusing its resources on its current private healthcare business, in our opinion.