Raffles Medical Group (KimEng)

Event

Raffles Medical Group’s (RMG) 2Q11 net profit came in at $11.6m (+10.1% YoY, +11.0% QoQ) on revenue of $67.0m (+14.3% YoY, +3.9% QoQ). The results were in line with our expectation with revenue and net profit for 1H11 making up, respectively, 51% and 46% of our full-year forecasts. An interim dividend of 1 cent per share was also declared. Maintain BUY and target price of $2.80.

Our View

RMG has delivered another set of consistent results and is on track to meet our full-year forecasts. In 2Q11, revenue for the Healthcare and Hospital Services divisions grew by 12.2% and 14.5% YoY, respectively. RMG does not provide further breakdown, but management guided that approximately half of the increase in revenue came from volume growth and the other half, from price increase.

Its Specialist Medical Centre at the newly purchased Thong Sia Building should commence operations in 2H12. The expansion of the existing Raffles Hospital for an additional 102,408 sq ft is also on track, having received the grant of provisional permission from the URA. Completion should be expected in two years. This should ensure that RMG can maintain its double-digit growth as its existing facilities reach full capacity.

The cost of healthcare has grown at a CAGR of 2.9% over the past 20 years, outpacing inflation rate of 1.4%. This trend is set to continue and would provide a natural environment for RMG to raise prices in the long term. In the short term, the group’s prices on average are still below those of Gleneagles and Mount Elizabeth Hospital, thus giving it some room for price increase. While staff cost would also continue to rise, RMG has done well in keeping this in pace with its revenue growth.

Action & Recommendation

We maintain our forecasts and DCF-based target price of $2.80. Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam has called for the private sector to play a bigger role in easing public healthcare strain and we believe that there could be positive benefits to the private healthcare sector. Reiterate BUY.