Confidence not lacking

FY11 results were a non-event. Management’s confidence was evident in its strong dividend commitment amid expansion. Property decanting is in play.

FY11 core profit meets consensus and our expectations (99%). We lower FY12-13 by 2% to reflect a maturing landscape, though our target got a lift from higher peer valuations (20x CY13 P/E, previously 22.5x CY12). FY14. EPS has been introduced. Maintain Outperform.

Strong dividend signal

4Q11 core EPS makes up 33% of FY11, a strong quarter. FY11 growth was powered by all divisions (Healthcare Services +10.9% yoy; Hospital +14.6% yoy). Hospital growth was spurred by volume (+5%), prices and the number of intensity cases (+9%). A final dividend of 3cts has been declared. Adding in its interim dividend of 1ct, FY11 DPS will be 4cts (FY10 3.5cts). We read this as a strong vote of management’s confidence in the health of its businesses and cash flows, despite capex commitments.

Properties at play

Planning and preparatory work for its Raffles Hospital (RH) expansion and Specialist Medical Centre is underway. In Jan 12, the group had decanted 15k sf of space (admin/backroom) in RH for conversion into healthcare dollar-churning businesses, contributing from 2Q12 onwards. RFMD also brought 5k sf of space in Samsung Hub in the CBD for use as a medical centre. Rental revenue from its two Orchard and CBD properties amounted to S$10.5m in FY12 (S$7.9m in FY11).

New government scheme

We expect RFMD to benefit from recent government initiatives to expand the Community Health Assist Scheme. Catalysts are expected from the addition of clinics/medical specialties, patient growth and intensity cases. We believe management has every reason to look at rate and fee hikes, now that RH’s charges are below market rates.

Raffles Medical posts 10.4% rise in Q3 profit

PRIVATE healthcare provider Raffles Medical Group (RMG) posted a 10.4 per cent increase in net profit to $11.79 million for the three months ended Sept 30, 2011 as both its hospital services and healthcare services divisions reported revenue growth.

In Q3 2011, revenue grew 13.5 per cent to about $69 million with its hospital services and healthcare services divisions registering growth of 14.1 per cent and 8.4 per cent, respectively. The group said that the improved performance was on the back of improved operating efficiencies, together with the recruitment of more specialist consultants, higher patient load and increased patient acuity.

Earnings per share were 2.21 cents, up from 2.04 cents in Q3 2010.

As at Sept 30, 2011, the group had a cash position of $40 million, which will help it to fund its growth plans.

During the quarter, Raffles Hospital recruited more doctors, with new staff specialists in orthopaedics and dermatology joining the hospital.

In an update on its Specialist Medical Centre at 30 Bideford Road, RMG said that the centre is slated to start operations in the first half of 2013. Planning and preparatory work for the expansion of Raffles Hospital by some additional 102,000 square feet is also underway.

Meanwhile, RMG is boosting its network of primary care clinics with two new clinics expected to open their doors in the fourth quarter – one at 112 Katong (formerly Katong Mall) and the other at Changi City Point – while Raffles Dental has also recruited more dental surgeons to support its growth.

Touching on the growing number of public and private hospitals set to open in the coming years, Dr Loo Choon Yong, RMG’s executive chairman, said: ‘Competition has never deterred us. We are, however, pleased that the government is working more closely with the private sector in providing medical care to Singaporeans. Raffles has stated clearly that we are prepared to participate actively in caring for public sector patients.’

Shares in RMG closed at $2.25 yesterday, one cent lower.

Strong pick up in patient load

• 4Q net profit exceeded our expectation on pick up in patient load and margins expansion

• Potential special dividends on high net cash level (c.S$90m/17.3Scents) by FYE10F

• Raise earnings by 17%/24%; CAGR of 21%

• Upgrade to Buy, TP raised to S$1.75 (33% upside)

Strong 4Q, net profits up 25%. 4Q revenue increased 13% yoy to S$58.3m driven by both Hospital and Healthcare services division, 8% above our expectations. 4Q EBIT margins expanded by 1.1ppt yoy and 1.6ppt qoq on slower growth in staff costs (+12%), other operating expenses (+3%) and lower depreciation (-3%). Consequently, net profit grew a strong 25% yoy to S$11.9m, above streets’ estimates (S$10.3m) and ours (S$9.6m). Net profit for FY09 ended at S$37.9m, a strong 20% growth in a year of recession. A 2 Scts final dividend was proposed, bringing FY09 total dividend to 3 Scts (FY08: 2.5 Scts).

Higher patient load, 4 new clinics in FY10. Management attributed revenue growth to a pick up in patient load as the economy climbs out of recession and fears of H1N1 fade. 4Q growth was stronger than expected and management projects momentum to continue. 4 new clinics will be opened in FY10F, adding to its existing network of 71 clinics in Singapore.

$50m net cash in kitty. The Group has cash holding of S$74.4m or S$50m (9.6 Scts/share) on a net cash basis. We project that the net cash will balloon further to S$90m (17.3 Scents/share) by end FY10. If the funds are not deployed, there is a high potential for special dividends, in our view. Assuming it retains S$50m net cash, this would avail up to S$40m for dividend distribution, equating to c.7.7 Scts/share.

Strong growth ahead; Upgrade to Buy, TP: S$1.75. The growth trend should continue, and with operating leverage, we raised earnings by 17%/24% for FY10F/FY11F. TP raised to S$1.75 pegged at 20x (historical mean) on FY10F EPS. Buy for its: (i) proven track record; (ii) improving operations; and, (iii) strong growth (15.6x PE, PEG 0.75x<1x). Catalyst could come from acquisitions or special dividends given its high cash level.

Strong 4Q09, dividend lifted

• Maintain Outperform; results above. With a stronger-than-expected 4Q09 net profit of S$11.9m (+24.3% yoy, 31.3% of our full-year forecast), FY09 net profit was S$37.8m (+20.1%), 7.9% ahead of our expectations owing to robust operating results from Hospital Services. The results also beat consensus expectations. We raise our FY10-11 estimates by 2.1-2.4% to reflect higher revenue and margin assumptions for both healthcare services and the hospital division. We also introduce FY12 numbers. Our target price rises from S$1.63 to S$1.66 following our upgrade, still based on 16x CY11 P/E. With its defensive business that delivers consistent earnings, maintain Outperform. We expect stock catalysts from the addition of clinics, expansion of medical specialties, and higher foreign-patient catchments. 

• Occupancy and patient load steady. Revenue from Healthcare Services and the hospital segment grew 10.2% and 7.9% yoy respectively. Average occupancy was stable at around 60%. Foreign patients still formed a third of the patient load with Indonesian patients accounting for 22% of the foreigners. This partly explained the increase in foreign patient volume. 

• Hallmark operating efficiencies. Operating profit increased to S$45.5m (+16.6% yoy) in FY09, attributable to improved patient admissions on the back of more clinics, added services and operating leverage. FY09 EBITDA margins improved 1.2% pts yoy to 23.8%. Staff expenses for FY09 rose only 6.7% yoy, below the pace of revenue growth. 

• Increase of DPS to 3Scts. Balance sheet was robust with a net cash position of S$49.9m. We mentioned before that RFMD could possibly use its balance sheet for capital-management exercises or higher dividend payouts. The group did not disappoint, having raised its DPS to 3 Scts for the year (from 2.5 Scts in FY08). 

• Organic FY10 growth. The group plans to launch four new clinics in FY10 (Changi Business Park, Mapletree Business Park, Marina Boulevard and Serangoon). Within its flagship hospitals, new bed rollout and space rationalisation to make room for more beds will come in the year.