Raffles Medical Group

Kim Eng on 24 Jul 2012

Results within expectations. Raffles Medical Group (RMG) reported 2Q12 revenue of SGD76.9m (+14.9% YoY, +5.5% QoQ) and corresponding net profit of SGD12.4m (+6.8% YoY, +6.9% QoQ). Results were in line with our expectations with 1H12 net profit making up 44% of our FY12F forecast. The second-half would typically be stronger. The company also declared an interim dividend of 1.0 cents per share. While our DCF-based target price of SGD2.71 is maintained, we downgrade the stock to a HOLD as we think that share price is now within a fair-value range.

Growth from all divisions. Revenue for Hospital services and Healthcare services divisions rose by 19.1% and 9.1% respectively. The higher revenue was driven by both higher patient load and patient acuity. We expect to see continual topline growth, which would be supported by the group’s expansion plans with its new Specialist Centre in Thong Sia Building and Raffles Hospital capacity expansion.

Margin compression from rising staff cost. As we pointed out in our previous report, RMG’s near-term challenge is in managing staff cost, which rose by 19.1% YoY this quarter. RMG increased wages to maintain competitiveness and recruited more staff to meet its business expansion needs. Net margin for the current reported quarter was lower by 1.2ppt YoY at 16.3%. However, we expect net margins on a full-year basis to be higher than in 2Q12, as RMG increases its average pricing.

Room for price increases. Management remarked that there is room for price increases and intends to do so to defend its margins and recover the higher staff cost increases. We expect price increases in the range of 10-20% in the coming quarters. We forecast net margins for FY12 to come in at 17.2%, which is about 1.3ppt lower than in FY11.

Valuation gap has closed, downgrade to HOLD. In our last report, we highlighted that RMG was the cheapest hospital stock in the region, trading at the widest valuation discount relative to peers. The valuation gap has closed after a 18% surge in share price since our last call, which is the premise behind our downgrade of the stock to HOLD. Implied FY12F/13F PERs based on our target price are 26.7x and 23.3x respectively.