• Strong revenue growth continues
• But higher costs from several fronts
• 2Q16 PATMI up 4.5% YoY

Small PATMI growth

Raffles Medical Group’s 2Q16 revenue grew 19.8% YoY to S$119.0m as both the Healthcare and Hospital Services divisions saw their segment revenue increased 42.2% and 7.9%, respectively. This was driven by higher patient load, expansion of clinic network, increased contribution from more specialist consultants as well as from International SOS (MC Holdings) and its subsidiaries (MCH).

Excluding contribution from MCH, the group’s revenue was up 8.7%. However, overall revenue growth was offset by higher costs such as staff costs due to staff recruitment for the new medical centre at Holland V. As a result, PATMI was up 4.5% to S$16.7m.

Near term cost pressures

As MCH is still seeing a small loss, the group’s operating profit would have grown 6.5% (vs. 4.1%) if contribution from MCH was excluded. MCH’s revenue improved slightly QoQ, while staff costs still accounted for about 57% of its revenue. With a few initiatives to drive patient visits, we believe MCH could breakeven next year. Within the healthcare services segment, we understand that the medical centre at Shaw Centre is poised to breakeven by 4Q16, while the new medical centre at Holland Village has already been seeing patients since early Jun and could breakeven in a year’s time.

Negotiations on-going for HV mall

On the group’s Holland Village Mall project, 60% of the mall has been committed, while negotiations are still on-going with several other potential tenants. Again, we are not overly concerned over the status of the mall, and we estimate rental income contributions to form 1- 2% of FY16-FY17F total revenue.

Maintain HOLD

In view of the above, we have trimmed our bottomline forecasts for FY16/FY17F by 6-8%. Rolling forward our valuation to 33.5x FY16/FY17 PE, our fair value estimate changes slightly to S$1.54 (previous: S$1.57). Maintain HOLD. Nevertheless, we believe the group’s pipeline of expansion plans give strength to its long term growth story, thus longer term investors can look to accumulate below S$1.45.

Source: OCBC Research - 26 Jul 2016