Founded as a two-clinic practice in 1976, Raffles Medical Group (RMG) now operates the largest local network of 65 General Practice clinics. Its flagship, Raffles Hospital, was established in 2001. Its impressive performance was reflected by the fact that it broke even within two years. In fact, the Group has been a model of consistency since its listing in 1997, registering double-digit profit growth almost every year.

We believe a congruence of factors such as an aging population, coupled with the influx of foreign immigrants, has benefited the private healthcare sector. Moreover, this year, the government introduced means testing in public hospitals, with the aims of increasing its efficiency in allocating subsidies and potentially shifting demand towards the private sector.

The employee remuneration model is a key criterion for healthcare providers. We believe RMG’s Group Practice Model, in which all its medical professionals are employees of the Group, is a more scaleable model and gives it a higher operating leverage than peers. We expect its staff cost as a percentage of revenue to continue declining.

Licensed for 380 beds, Raffles Hospital is capable of ramping up its capacity from its current 200 operational beds. This is in contrast to a potentially tight private sector supply, with new beds only by 2013. With a strong financial position, this is an opportune time for RMG to expand overseas, where it has previously been more conservative than its peers.

Even with just organic growth, we expect net profit to increase 14% CAGR over the FY09-FY11 period. Its strong cash position could prompt M&A activities as well as an increased dividend payout. Our Free Cash Flow to Equity (FCFE) target price implies 20x FY09 estimated earnings. Since 2002, RMG has traded at a P/E trough of 13x and a peak of 29x.