Raffles Medical achieved PATMI of S$12.4m for 2Q12 (+6.8% YoY), as revenue grew 14.9% YoY. The results were in line with expectations. Revenue growth was boosted by an increase in both patient volume and revenue intensity. Staff cost was higher as expected, as Raffles Medical hired more staff in preparation for operations at Thong Sia to begin in mid-2013. Management remains confident that it would be able to maintain its dividends (4.0 S''/share in FY11). We remain optimistic of Raffles Medical's outlook, with growth drivers coming from its Specialist Centre @ Thong Sia and its hospital extension in FY14. We have tweaked our FY12 earnings estimate to S$55.9 (previously S$55.2m), as Raffles Medical revises its charges and patient volumes remain healthy. Our DCF-based TP has been raised slightly to S$2.72 (previously S$2.67). The stock has rallied 18% in recent weeks, on the impending listing of IHH Healthcare, and is now trading at a P/E of 25x FY12F earnings (vs historical PE band of 18x ' 26x). Downgrade to NEUTRAL.

Room to raise fees and grow revenue. Besides hiring more staff, management also recently adjusted the salaries of its doctors, contributing to 19.1% YoY higher staff costs. As a result, 2Q12 EBIT margins were slightly lower at 19% (vs 21% in 2Q11). Management expects to be able to recover this cost, as it progressively raises its charges. Its price point is currently closer to what the public hospitals are charging, and ~20% below that of its competitors (historically ~10% lower), which gives Raffles Medical room to grow its revenue further.

Growth drivers expected from 2014. Once its 102,480 sq ft hospital extension and the Specialist Medical Centre fully come on stream (expected in FY14), Raffles Medical would be able to expand its range of healthcare services and further drive growth.

Strong balance sheet. Raffles Medical has a net cash balance of S$63.9m or 11.7 S''/share as at 2Q12, helped by its stable cash flows from operations.

Source: OSK