RAFFLES MEDICAL GROUP - Room to grow (DMG)

BUY

Price S$2.34

Previous S$2.52

Target S$2.55

Continues to grow earnings, Maintain BUY. Raffles Medical’s 2Q11 PATMI grew 10.1% YoY to S$11.6m, as revenue rose 14.3% YoY. The results exceeded our 2Q11 estimates slightly. 2Q11 earnings included start up losses from its Shanghai medical centre (expect to breakeven in FY13) and there were also job credits grants received in 2Q10. Excluding these, PATMI would have increased by ~17% YoY. Raffles Medical’s fees are not as high as other private hospitals and management believes that it still has room to raise fees. Management indicated that it will continue to pay out at least 3.0 S¢/share dividends in FY11. We re-iterate our BUY recommendation and DCF-based TP of S$2.55.

Expansion plans on track. Purchase of Thong Sia Building has completed and management expects the operations of its Specialist Medical Centre there to commence in 2H12. It expects to spend capex of ~S$10m – 15m (including equipment) for its Specialist Medical Centre, which we believe would be met by its stable operating cashflows (~S$10m / quarter).

Integrating public with private healthcare would improve patient load, but.... The government has not put through any policy on how private doctors can help ease the supply crunch. One possibility is for private healthcare providers like Raffles Medical to treat subsidised patients. Depending on the way the subsidy is structured, this could either boost earnings (there is no price ceiling on the patients’ cost of treatment. Patient pays subsidised amount and provider claims the balance cost), or lower its operating margins (the cost of treatment is fixed).

Remain positive on propects, raise earnings estimates. 1H11 earnings represented 50% of our FY11 estimates. Raffles Medical’s earnings tend to be stronger in 2H. We remain positive on Raffles Medical’s prospects, given the strong demand for healthcare in Singapore. Hence, we are tweaking our FY11 revenue and earnings estimates to S$269.5m (previously S$263.1m) and S$46.2m (previously S$44.4m) respectively. We arrive at a TP of S$2.55, based on DCF.