RafflesMed – OCBC

SOFTENING OUR GROWTH ASSUMPTIONS

Double-digit revenue and PATMI growth

Still room for expansion

Competition & cost pressures the key risks

1Q12 earnings slightly below expectations

Raffles Medical Group (RMG) reported 1Q12 revenue which was within our expectations but PATMI was slightly below. Revenue increased 13.2% YoY and 0.9% QoQ to S$72.9m, forming 23.2% of our fullyear estimates. EBIT improved 11.0% YoY but fell 20.6% QoQ to S$14.2m, while PATMI was up 10.9% YoY but declined 29.6% QoQ to S$11.6m, meeting 19.6% of our FY12 forecasts. 1Q is traditionally RMG’s weakest quarter, which explains the significant sequential drop in its earnings. We also expect the decanting of its existing hospital facilities to free-up ~15,000 sf of ‘new’ medical space to begin its contribution from 2Q12.

Hospital Services division to underpin its earnings momentum

Both its Hospital Services and Healthcare Services divisions contributed positively, with YoY revenue growth of 15.3% and 7.4%, respectively. The former was driven largely by a higher patient load and acuity. Moving forward, we see potential for further traction in the future, as the Singapore government is exploring the feasibility of engaging RMG in the treatment of subsidised patients, although details have yet to be worked out.

Growth trend still healthy, but easing our growth assumptions

We believe that RMG remains well-poised to capture the sturdy demand for high quality healthcare services from both local and foreign patients. This is buttressed by its strong track record and brand equity, coupled with increased depth of medical specialties on offer. Nevertheless, we soften our growth assumptions on the back of higher competitive and cost pressures. The latter is driven largely by an expected increase in staff costs, given the Singapore government’s decision to raise the wages of healthcare professionals. We lower our revenue and PATMI estimates for FY12/FY13 by 0.6%/1.9% and 3.0%/2.1%, respectively. Maintain BUY on RMG, albeit with a revised fair value estimate of S$2.58, versus S$2.66 previously (still based on 24x FY12F EPS).

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