Raffles Medical Group

OCBC on 13 Jul 2012

We believe that Raffles Medical Group (RMG) would continue to be a key beneficiary of the uptrend in medical travellers’ growth, given its strong brand equity and depth of specialist offerings. The group has expansion plans in the pipeline, including a new Specialist Centre in the Orchard area and an extension of its Raffles Hospital. Meanwhile, we ease our EBIT margin assumptions as we incorporate higher staff costs in our model. This correspondingly lowers our FY12 and FY13 PATMI estimates by 2.1% and 1.4%, respectively. Nevertheless, we believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre, which will only begin contributing from 1H13. 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.

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.