Raffles Medical (RMG) post 1Q09 net profit growth of 28% y-y, beating our full-year forecast of 12.6% and consensus of 2%. Net profit in 1Q09 reached 23% of our full-year forecast, which is laudable considering the Lunar New Year holiday. Historically, RMG’s 1Q net profit makes up 18-19% of its full-year earnings.

Despite slower revenue growth of 7.6% y-y, we believe RMG demonstrated its ability to control costs and grow earnings with operating leverage. In particular, inventories and consumables used (as a % of revenue) continued to trend downwards (Exhibit 3), reaffirming the benefits of the group practice model in controlling variable costs. The group also contained its staff costs in line with revenue, despite having increased its headcount by 50.

Revenue growth has visibly slowed from 17-29% y-y in the past four quarters, to 7.6% y-y in 1Q09. The healthcare services segment (including its primary care network and insurance arm) grew by 10.8% y-y, we think confirming its defensiveness. Foreign patient volume grew by 8% y-y, while local patient volume was flat. Management remains cautiously optimistic on the outlook, and emphasised that 1Q is usually the weakest quarter of the year.

The 1Q09 results support our above-consensus view that: 1) RMG is a defensive healthcare player, which should continue to grow in the recession, albeit at a slower rate; and 2) the group enjoys cost efficiencies as a group practice and can use its operating leverage to drive earnings growth. The strong 1Q09 results signal potential upside to our full-year forecasts. We conservatively peg our DDM-derived price target of S$1.07 to actual cashflows to investors. The main risks to our price target is the group’s ability to contain its staff costs.