RMG recently implemented wage increments

Fair value S$2.73


Healthy medical travel growth trend
We believe that Raffles Medical Group (RMG) would continue to benefit strongly from the healthy uptrend in medical travellers to the region, despite growing supply of new hospital beds from both local and regional competitors. This is premised on the group’s competitive pricing vis-à-vis its comparable peers, strong brand equity and continued drive to enhance the depth of its specialist offerings. Research firm Frost & Sullivan projected that the number of medical travellers to Singapore and the corresponding revenues generated would grow at a CAGR of 12.4% and 13.6% to 851k and S$2.03b, respectively, from 2012 to 2016.

Steady expansion plans to address rising demand
RMG’s new Specialist Centre in Orchard is scheduled to begin operations in 1H13, while its Raffles Hospital extension (additional 102,408 sf) is expected to be completed in early 2015. In the meantime, management has actively decanted some of its existing hospital facilities. This resulted in the opening of a Neuroscience specialist centre in Apr, while renovation works are ongoing for the expansion of its Health Screening facilities. We reckon this would improve its income streams as there could be follow-up treatment procedures.

Ease our margin assumptions slightly, but
maintain BUY
RMG recently implemented wage increments across the board in 2Q12, driven by the Singapore government’s initiative to raise salaries in the public healthcare sector. We ease our EBIT margin assumptions and our PATMI forecasts for FY12 and FY13 are reduced by 2.1% and 1.4%, respectively. We believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre. While these additional staff would also aid in the generation of revenue at existing premises now, pre-operating expenses incurred would cause some drag on its earnings as their contribution is not at an optimal level yet, in our view. We roll-forward our valuations to 24x blended FY12/13F EPS, which in turn raises our fair value estimate from S$2.58 to S$2.73. Maintain BUY.

Poised to benefit from healthy medical travellers uptrend
With a rising middle-class and growing affluence in the region, coupled with the proliferation of social media which has enhanced the health awareness of people, we believe that RMG stands to be a key beneficiary of the expected growth in medical travellers to Singapore. This is premised on the group’s competitive pricing vis-à-vis its comparable peers, strong brand equity and continued drive to enhance the depth of its specialist offerings. Approximately 35% of RMG’s patient mix is made up of foreigners. Research firm Frost & Sullivan projected that the number of medical travellers to Singapore and the corresponding revenues generated would grow at a CAGR of 12.4% and 13.6% to 851k and S$2.03b, respectively, from 2012 to 2016. According to RMG, it experienced a significant increase in patients from Indochina in 2011, while patient visits from the Middle East also recorded a double-digit increase. We believe that Indonesians still forms the majority of RMG’s foreign patient pool.

Maintain our BUY rating
RMG’s share price has appreciated 14.2% YTD, versus the STI’s 12.3% YTD increase. We believe this can be attributed to two key factors: 1) continued uncertainties over the macro economy which has led to a flight to quality defensive stocks, and 2) the imminent dual-listing of IHH Healthcare Berhad, which we believe could lead to a further industry rerating. Although we lower our PATMI estimates for FY12 and FY13 slightly by 2.1% and 1.4% respectively, on lower margin assumptions, our fair value estimate is raised from S$2.58 to S$2.73 as we rollforward our valuations to 24x blended FY12/13F EPS. We believe that part of RMG’s cost pressure also arose from headcount expansion in preparation for the commencement of its new Specialist Centre. While these additional staff would also aid in the generation of revenue at existing premises now, pre-operating expenses incurred would cause some drag on its earnings as their contribution is not at an optimal level yet, in our view. This would be mitigated once operations at its new Specialist Centre are ramped up in FY13. Maintain BUY for RMG’s defensive qualities and growth profile.