Valuations appear rich

Raffles Medical achieved PATMI of S$12.4m for 2Q12 (+6.8% YoY), as revenue grew 14.9% YoY. The results were in line with expectations. Revenue growth was boosted by an increase in both patient volume and revenue intensity. Staff cost was higher as expected, as Raffles Medical hired more staff in preparation for operations at Thong Sia to begin in mid-2013. Management remains confident that it would be able to maintain its dividends (4.0 S¢/share in FY11). We remain optimistic of Raffles Medical’s outlook, with growth drivers coming from its Specialist Centre @ Thong Sia and its hospital extension in FY14. We have tweaked our FY12 earnings estimate to S$55.9 (previously S$55.2m), as Raffles Medical revises its charges and patient volumes remain healthy. Our DCF-based TP has been raised slightly to S$2.72 (previously S$2.67). The stock has rallied 18% in recent weeks, on the impending listing of IHH Healthcare, and is now trading at a P/E of 25x FY12F earnings (vs historical PE band of 18x – 26x). Downgrade to NEUTRAL.

Room to raise fees and grow revenue. Besides hiring more staff, management also recently adjusted the salaries of its doctors, contributing to 19.1% YoY higher staff costs. As a result, 2Q12 EBIT margins were slightly lower at 19% (vs 21% in 2Q11). Management expects to be able to recover this cost, as it progressively raises its charges. Its price point is currently closer to what the public hospitals are charging, and ~20% below that of its competitors (historically ~10% lower), which gives Raffles Medical room to grow its revenue further.

Growth drivers expected from 2014. Once its 102,480 sq ft hospital extension and the Specialist Medical Centre fully come on stream (expected in FY14), Raffles Medical would be able to expand its range of healthcare services and further drive growth.

Strong balance sheet. Raffles Medical has a net cash balance of S$63.9m or 11.7 S¢/share as at 2Q12, helped by its stable cash flows from operations.

Valuations appear rich

Raffles Medical achieved PATMI of S$12.4m for 2Q12 (+6.8% YoY), as revenue grew 14.9% YoY. The results were in line with expectations. Revenue growth was boosted by an increase in both patient volume and revenue intensity. Staff cost was higher as expected, as Raffles Medical hired more staff in preparation for operations at Thong Sia to begin in mid-2013. Management remains confident that it would be able to maintain its dividends (4.0 S¢/share in FY11). We remain optimistic of Raffles Medical’s outlook, with growth drivers coming from its Specialist Centre @ Thong Sia and its hospital extension in FY14. We have tweaked our FY12 earnings estimate to S$55.9 (previously S$55.2m), as Raffles Medical revises its charges and patient volumes remain healthy. Our DCF-based TP has been raised slightly to S$2.72 (previously S$2.67). The stock has rallied 18% in recent weeks, on the impending listing of IHH Healthcare, and is now trading at a P/E of 25x FY12F earnings (vs historical PE band of 18x – 26x). Downgrade to NEUTRAL.

Room to raise fees and grow revenue. Besides hiring more staff, management also recently adjusted the salaries of its doctors, contributing to 19.1% YoY higher staff costs. As a result, 2Q12 EBIT margins were slightly lower at 19% (vs 21% in 2Q11). Management expects to be able to recover this cost, as it progressively raises its charges. Its price point is currently closer to what the public hospitals are charging, and ~20% below that of its competitors (historically ~10% lower), which gives Raffles Medical room to grow its revenue further.

Growth drivers expected from 2014. Once its 102,480 sq ft hospital extension and the Specialist Medical Centre fully come on stream (expected in FY14), Raffles Medical would be able to expand its range of healthcare services and further drive growth.

Strong balance sheet. Raffles Medical has a net cash balance of S$63.9m or 11.7 S¢/share as at 2Q12, helped by its stable cash flows from operations.

Downgrading to HOLD

● 2Q12 PATMI of S$12.4m (+7% YoY)

● 1 S cent/share interim dividend

● Upside likely limited after recent share price surge

2Q12 revenue in line but PATMI misses slightly

Raffles Medical Group (RMG) reported its 2Q12 results with revenue within our expectations but PATMI was slightly below due to higher-than-expected operating expenses. Revenue rose 14.9% YoY and 5.5% QoQ to S$76.9m. PATMI was up 6.8% YoY and 6.9% QoQ to S$12.4m. Topline growth was driven by both its Hospital Services and Healthcare Services divisions, which increased 19.1% and 9.1% YoY, respectively. For 1H12, revenue jumped 14.0% to S$149.9m, forming 48.0% of our full-year estimates; while PATMI increased 8.7% to S$24.0m, or 42.8% of our FY12 forecast. 2H is typically a seasonally stronger half for RMG, and we expect this trend to be maintained in FY12. An interim dividend of 1 S cent/share was declared (payable on 31 Aug 2012), similar to 1H11 and is in line with our expectations.

Cost pressures higher-than-expected

Staff costs grew 19.1% YoY on the back of salary increments and a 14% increase in headcount in anticipation of its expanded operations. The former was in line with industry-wide wage adjustments. The group also incurred higher operating lease expenses (+23.6% YoY) and inventories and consumables costs (+23.1% YoY) which rose faster than revenue growth. As a result, RMG’s net margin eased from 17.4% in 2Q11 to 16.1% in 2Q12.

Growth still expected, but downgrade to HOLD

RMG’s share price has accelerated 16.7% since the start of July (+21.7% YTD), far outpacing that of the broader market (+3.6%). We believe this has been buoyed largely by positive sentiment from the impending dual-listing of IHH Healthcare Berhad; although the group’s defensive earnings quality has also found flavor amongst investors given the still-volatile macroeconomic landscape. We maintain our revenue projections but adjust our PATMI estimates downwards by 4.2% for FY12 and 3.0% for FY13 on lower margin assumptions.

This correspondingly decreases our fair value estimate from S$2.73 to S$2.63 (24x blended FY12/13F EPS). While we expect RMG’s earnings growth to remain fairly resilient despite cost pressures, we see limited upside from current price level. Downgrade RMG from Buy to HOLD.

RMG’S Q2 NET GAIN UP 6.8% TO $12.4M

Raffles Medical Group posted a 6.8 per cent year‐on‐year increase in net profit to $12.42 million for the second quarter to June 30 as revenue rose 14.9 per cent to $76.9 million.

Second‐quarter results were boosted by stronger contributions from both its hospital and healthcare services business segments. Earnings per share worked out to 2.31 cents in Q2FY12, up from 2.20 cents in Q2FY11.

The second quarter saw staff costs rising 19.1 per cent to $37.8 million as the group bumped up headcount by 13‐14 per cent to meet expansion needs and also adjusted wages in line with the industry.

For the six months ended June 30, net profit came in 8.7 per cent higher at $24.04 million while revenue climbed 14 per cent to $149.85 million. The group declared an interim dividend of one cent, payable on Aug 31.

Growth at Raffles Hospital is being driven by a number of factors, including a widening foreign pa

STILL POISED FOR GROWTH

•Strong beneficiary of medical travel growth

•Capacity to increase in stages

•Raising fair value to S$2.73

Healthy medical travel growth trend

We believe that Raffles Medical Group (RMG) would continue to benefit strongly from the healthy uptrend in medical travellers to the region, despite growing supply of new hospital beds from both local and regional competitors. This is premised on the group’s competitive pricing vis-à-vis its comparable peers, strong brand equity and continued drive to enhance the depth of its specialist offerings. Research firm Frost & Sullivan projected that the number of medical travellers to Singapore and the corresponding revenues generated would grow at a CAGR of 12.4% and 13.6% to 851k and S$2.03b, respectively, from 2012 to 2016.

Steady expansion plans to address rising demand

RMG’s new Specialist Centre in Orchard is scheduled to begin operations in 1H13, while its Raffles Hospital extension (additional 102,408 sf) is expected to be completed in early 2015. In the meantime, management has actively decanted some of its existing hospital facilities. This resulted in the opening of a Neuroscience specialist centre in Apr, while renovation works are ongoing for the expansion of its Health Screening facilities. We reckon this would improve its income streams as there could be follow-up treatment procedures.

Ease our margin assumptions slightly, but maintain BUY

RMG recently implemented wage increments across the board in 2Q12, driven by the Singapore government’s initiative to raise salaries in the public healthcare sector. We ease our EBIT margin assumptions and our PATMI forecasts for FY12 and FY13 are reduced by 2.1% and 1.4%, respectively. We believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre. While these additional staff would also aid in the generation of revenue at existing premises now, pre-operating expenses incurred would cause some drag on its earnings as their contribution is not at an optimal level yet, in our view. We roll-forward our valuations to 24x blended FY12/13F EPS, which in turn raises our fair value estimate from S$2.58 to S$2.73. Maintain BUY.