Raffles Medical Group

DBS Group Research on 23 July 2012

RAFFLES Medical Group's Q2 2012 results are below expectations. Net profit rose 6.8 per cent y-o-y to $12.4 million, while topline revenue grew a robust 14.9 per cent y-o-y to $76.9 million. The lower-than-expected growth was a result of higher cost items, such as staff costs (up 19.1 per cent at $37.8 million), inventory and consumables (up 23.1 per cent at $9.4 million), and operating lease expenses (up 23.6 per cent at $1.8 million). Earnings before interest and tax (Ebit) margins fell 1.9 percentage points to 19.5 per cent in Q2 2012 from 21.4 per cent a year ago.

The bright spot was the growth in revenues, largely due to strong contribution from its hospital division, which registered a growth rate of 19.1 per cent y-o-y. We understand that patient volumes and price/intensity had contributed equally to this growth.

The group has appointed consultants to work on a 42,668 sq ft property at Thong Sia Building, and it is expected to commence operations in H1 2013. Expansion plans for its hospital are likely to commence operations in late 2014 or by early 2015.

The higher staff costs are a result of newly recruited employees to meet business expansion requirements. Higher wages are also in line with industry-wide salary adjustments. This is not a surprise as the Ministry of Health has recently indicated that public-sector medical and allied healthcare workers' compensation will increase by some 20 per cent by 2014, with the first increase in April 2012.

This counter is trading at 25 times forecast FY2012 earnings, which is above its historical mean of around 21 times. The stock has recently re-rated on the back of higher multiples for the healthcare sector.

We have trimmed our FY2012/13 earnings forecasts marginally by 2.2 per cent and one per cent, respectively, on the back of higher staff costs. Though the prospects of the healthcare industry are still resilient, we see competitive pressures rising. With the stock trading at above-mean valuations, although operations are stable, we believe there is limited upside from current level. Maintain "hold", with a revised target price of $2.59.

HOLD