Raffles Medical Group

3QFY07: Economics of scale Raffles Medical Group (RMG) reported a good set of results for 3Q07 with net profit of S$6.5m (+60.1% yoy) on revenue of S$43.8m (+25.2% yoy). The results were significantly better than our net profit forecast of S$5.1m. Raffles Hospital is key growth driver. Revenue from Hospital Services expanded 35.7% to an estimated S$26.2m. Raffles Hospital benefited from an increase in volume of foreign and local patients accompanied by higher revenue intensity. There were contribution from more complex procedures such as spinal surgeries, neural surgeries, fertility treatments and increased usage of neo-natal intensive care unit (ICU). Raffles Hospital has also reduced the amount of discount to corporate customers given the buoyant economic environment. The increase in patient volume has led to improvement in operating efficiency. Inventories & consumable used was controlled at 10.9% of sales in 3Q07, compared to 11.9% in the previous quarter, benefiting from greater scale in procurement. Gaining full ownership of the hospital building has also allowed Raffles Hospital to convert some office space into hospital and clinic space. Raffles Hospital benefited from economies of scale, as there is minimal increase in fixed costs as more beds are added. Overall EBITDA margin expanded from 17.9% in 2Q07 to 19.4% in 3Q07 due to margin expansion at Raffles Hospital. Steady growth from Healthcare Services. Revenue from Healthcare Services expanded 12.1% to an estimated S$17.6m. The buoyant economic environment resulted in more hiring and increased patient volume at its network of family medicine clinics from both corporate and individual customers. There was also increased contribution from International Medical Insurer (IMI). Continuing to expand network of clinics. RMG has opened a new Japanese clinic at International Building in Orchard Road in Oct 07. This is the second satellite clinic for Raffles Japanese Clinic. RMG will also start a new 24-hour multi-disciplinary medical centre at Terminal 3, which will open in Jan 08. The centre will provide family medicine, specialist care, emergency care, occupational medicine, aesthetics and health screening. Expansion into clinical research. Pfizer has set up the biggest clinical research unit in Singapore at Raffles Hospital. The S$67m 38,000sf facility is Pfizer’s third Phase 1 labs on a worldwide basis. Maintain BUY. We like RMG for the growth momentum at Raffles Hospital. Raffles Hospital will benefit from the influx of foreign patients, increase in revenue intensity and positive impact from economies of scale. We raised our target price to S$2.10 based on our three-stage discounted cash flow model.