Raffles Medical Group

DMG & Partners Research, July 22

RAFFLES Medical's (RFMD) Q2 FY2013 profit after tax and minority interests (Patmi) rose 15.9 per cent y-o-y to S$14.4 million as revenue grew 12.9 per cent y-o-y to S$86.8 million. Increased revenue intensity, as well as higher charges for some services, boosted margins. Its hospital extension is progressing well, with completion due by end-2015.

The performance of the company's healthcare and hospital services was boosted by new corporate contracts and the provision of a broader scope of medical services. Operating margin improved 20.3 per cent in Q2 FY2013 from 19.5 per cent previously, and is likely to continue to improve ... Its balance sheet remains strong, with net cash of S$122.4 million (or S$0.22 per share) as at end-Q2 FY2013.

Healthcare costs increase as the population ages. This could benefit private healthcare providers as there could be some spillover effects. In addition, the strain on the public system is likely to grow, with demand spilling over to the private healthcare sector, which may experience strong demand. With its existing fees ranging 20 to 30 per cent below those of its competitors, RFMD still enjoys room for further upward price adjustments ...

As the demand for healthcare services is expected to remain robust, this should bolster earnings growth in the next few quarters. However, at this point, we feel that RFMD's growth potential is somewhat limited by its current capacity. Our target price of S$3.30 is based on discounted cash flow.

NEUTRAL