Raffles Medical Group - 2Q09 results: decent growth even in diffcult times

2Q09 results were above expectations. RFMD reported better than expected 2Q09 results with revenue increasing by 6.5% YoY to S$53.9m on the back of a strong growth in healthcare services (+12.3% YoY) and stable growth in hospital services (+4.8% YoY). As a result of improved operating leverage, earnings grew by 13.8% YoY to S$8.8m in 2Q09. 1H09 earnings grew by 19.9% YoY to S$16.6m, or around 53% of our FY09 earnings forecasts.

H1N1 pandemic is increasing the demand for healthcare services. The strong growth in healthcare services in the 2Q09 was due to an increase in patient visits at its Raffles Medical's GP clinics for flu vaccinations and antiviral drug Tamiflu. We believe that this trend could continue and increase the demand for healthcare services in the healthcare sector. The company can benefit from this trend as it has one of the largest clinic networks in Singapore and its clinics are all prepared to pandemic cases.

Hospital services continues to see efficiencies despite increased costs due to H1N1. Despite the increased costs due to temperature screening and other measures as a result of the H1N1 pandemic, operating expenses decreased by 10% YoY to S$5.1m as a result of cost cutting measures. Overall patient volumes at the hospital grew by 5% with pricing staying relatively flat. Local patient volumes showed a decline in the 2Q09 but were helped by the continued growth in foreign patient volumes.

Strong cash position and stable dividend. The company has increased its cash position to S$27.5m from S$17.9m in 2008 and has declared a dividend of SGD0.01/share in 2Q09. Mgmt continues to see a stable growth in hospital services and strong demand for its healthcare services.

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Raffles Medical - Steady growth

RMG posted 2Q09 net profit growth of 13.8% (1H09: 20%), largely in line with our full-year forecast of 14.0% and above consensus forecast of 6.0%. Revenues grew 6.5% y-y, on the back of strong 12.3% growth in its healthcare services segment (which comprises its primary care network and insurance arm). Hospital services revenue growth remains muted at 4.8% y-y.

According to management, patient load at Raffles Hospital increased 5% y-y, driven by 13% growth in foreign patient volumes across a diversified market. On the other hand, local patient volumes declined 7% likely due to fears of the H1N1 pandemic. Management highlighted that the decline is probably not due to locals switching to subsidised care, as public hospitals too witnessed a similar decline in volumes. Management also guided that patient flows have since recovered this month.

Having opened three clinics this year, management believes the group will continue to expand its primary care network, with a target of five clinics per year on average. While management is aware of the intensifying competition in this space, it continues to be positive on increasing its patient base in this fragmented market through its integrated approach to healthcare.

Management also highlighted that its hospital has the potential to increase its capacity by adding two additional floors to its existing building. In the near term, it could relocate its corporate offices to increase bed capacity, if demand rises. We note that it is currently operating 200 beds of the 380 registered beds.

We reiterate our BUY rating on the stock, with a price target of S$1.30, which implies 23% potential upside. We peg our price target to 16.4x FY10E P/E, which is within the mean of RMG’s historical trading range.

Raffles Medical Group – Yet another record quarter

RMG posted a solid set of results for 2Q09, with revenue increasing 6.5% yoy to a record $53.9m and net profit increasing 13.8% yoy to $8.8m. Revenue from Healthcare Services (clinics) and Hospital Services grew 12.3% and 4.8% respectively during this period.

For its hospital, a 7% decline in local patients was offset by a 13% increase in foreign patients. While the recession could have played a role in this decline, management believes the H1N1 pandemic was the major reason, noting that the public hospitals are seeing the same trend of people staying away from hospitals if possible. There were also minor exceptional costs involved in public and infection control measures.

Management continues to keep a tight lid on operating efficiencies. Staff cost, the major cost component, continues its steady decline from 49% of revenue in FY08 to 48% in 1H09, resulting in increased profits. 1H09 net profit of $16.6m now forms 45% of our FY09 forecast. With the effects of H1N1 now gradually subsiding, we expect stronger performance in 2H09.

With the full ownership of its Raffles Hospital since 2007, RMG has been generating stronger cash flow than ever. With a net cash position of $27.5m, management continues to be on a lookout for opportunities. However, since management prefers Greenfield projects which do not require as much outlay, we deem that a cash distribution could be likely.

With this stellar set of results achieved against the backdrop of the global recession and the H1N1 pandemic, it is another testament to RMG’s brand of consistent incremental growth. We keep our forecasts intact and expect RMG to comfortably surpass the FY09 consensus NP of $33.5m. Our FCFE target price of $1.38 implies 20X FY09 estimated earnings.