Below expectations. 3Q12 results were slightly below expectations as profit was hampered by cost pressure, especially on the wage front. There were also hiccups on the capacity expansion plans. While revenue growth is still strong currently, the delay is a worry, given that RMG is nearing its capacity limitations in its current single hospital.

Cost pressure resulted in slow profit growth. Despite healthy revenue growth of 14% for the quarter, bottomline was up only 7%, which is a similar trend for 9M12 figures. The main culprit was staff cost, which was up 17%. This is a crucial cost line, which historically made up almost 50% of revenue. There were two factors 1) New staff hired in anticipation of business in the new Thongsia Building 2) An impending 8-10% industry-wide adjustment for nursing and auxiliary staff in Singapore this year. There were also higher expenses generally across the board, such as purchased services and consumables.

Revenue growth remains strong. Both the hospital services and healthcare services (mainly clinics) showed similar growth. Management shared that the 15% growth for hospital services was driven equally by higher pricing and volume. We understand that in terms of pricing, public hospitals have recently caught up with RMG, hence management’s belief that there is pricing upside to mitigate cost increases going forward.

First application to convert Thongsia Building unsuccessful. The application for converting this building, which was purchased for SGD92m in 2011, has not been successful, presumably due to traffic concerns, although earlier discussions with Ministry of Health went smoothly. Management is still optimistic that operations will commence there by 2H13, and has prepared for a second application.

Conservative stance may now scupper growth. The delays at Thongsia Building (especially if 2nd application fails) and capacity expansion at Raffles Hospital imply management may have under-catered for volume growth. This may scupper profit growth going forward, which would result in a possible de-rating of the stock. We maintain HOLD, with a TP of SGD2.55, pegged to 22x FY13F PER.

Source: Maybank Kim Eng Research - 23 Oct 2012