Towards Financial Freedom
Raffles Medical Group - Growth Capped By Capacity Constraints
RFMD's 2QFY13 PATMI rose 15.9% y-o-y to SGD14.4m as revenue grew 12.9% y-o-y to SGD86.8m. Increased revenue intensity, as well as higher charges for some services, boosted margins. Its hospital extension is progressing well, with completion due by end-2015. RFMD continues to focus on expanding its services, although we are of the view that growth will be limited by its existing capacity.
- Results in line with expectations. The performance of the company's healthcare and hospital services were boosted by new corporate contracts and the provision of a broader scope of medical services. Operating margin improved 20.3% in 2QFY13 from 19.5% previously,
and is likely to continue to improve as there is still room for RFMD to adjust prices higher. Its balance sheet remains strong, with net cash of SGD122.4m (or SGD0.22 per share) as at end-2QFY13. - Government healthcare spending likely to increase. Healthcare costs increase as the population ages. This could benefit private healthcare providers as there could be some spillover effects. In addition, the strain on the public system is likely to grow, with demand spilling over to the private healthcare sector, which may experience strong demand. With its existing fees ranging 20%-30% below those of its competitors, RFMD still enjoys room for further upward price adjustments, which could translate into potential revenue growth.
- Selling Thong Sia building. RFMD has called for a tender to sell off its Thong Sia building, as it was unable to obtain approvals for the change of use into a medical facility. The tender is still open and the company expects to announce its decision over the next few weeks. Despite this setback, RFMD remains on the lookout for a suitable location along Orchard Road to set up a specialist medical centre.
- Maintain NEUTRAL, TP SGD3.30. As the demand for healthcare services is expected to remain robust, this should bolster earnings growth in the next few quarters. However, at this point, we feel that RFMD's growth potential is somewhat limited by its current capacity. Our TP of SGD3.30 is based on DCF.
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