Raffles Medical Group

OCBC on 24 Jul 2012

Raffles Medical Group’s (RMG) 2Q12 revenue of S$76.9m (+14.9% YoY; +5.5% QoQ) was in line with our expectations but PATMI of S$12.4m (+6.8% YoY; +6.9% QoQ) was slightly below due to higher-than-expected operating expenses. Topline growth was driven by both its Hospital Services and Healthcare Services divisions, which increased 19.1% and 9.1% YoY, respectively. As expected, an interim dividend of 1 S cent/share was declared, similar to 1H11. We maintain our revenue projections but cut our PATMI estimates for FY12 by 4.2% and FY13 by 3.0% on lower margin assumptions. Our fair value estimate thence declines from S$2.73 to S$2.63. While we expect RMG’s earnings growth to remain fairly resilient despite cost pressures, we see limited upside from current price level given its recent share price surge. Downgrade RMG from Buy to HOLD.

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 flavour 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.