Raffles Medical (RMG) delivered good 2Q09 results, with 13.8% net profit growth, in line with our above-consensus forecasts. While its operations were affected slightly by the H1N1 virus — with increased operating costs and a 7% decline in local patient volumes at its hospital, we believe its primary care network continues to show resilience with 12% top-line growth. Foreign patient volumes also increased 13% y-y, across a diversified market. We reiterate our BUY rating.

RMG posted 2Q09 net profit growth of 13.8% (1H09: 20%), largely in line with our full-year forecast of 14.0% and above consensus forecast of 6.0%. Revenues grew 6.5% y-y, on the back of strong 12.3% growth in its healthcare services segment (which comprises its primary care network and insurance arm). Hospital services revenue growth remains muted at 4.8% y-y.

According to management, patient load at Raffles Hospital increased 5% y-y, driven by 13% growth in foreign patient volumes across a diversified market. On the other hand, local patient volumes declined 7% likely due to fears of the H1N1 pandemic. Management highlighted that the decline is probably not due to locals switching to subsidised care, as public hospitals too witnessed a similar decline in volumes. Management also guided that patient flows have since recovered this month.

Having opened three clinics this year, management believes the group will continue to expand its primary care network, with a target of five clinics per year on average. While management is aware of the intensifying competition in this space, it continues to be positive on increasing its patient base in this fragmented market through its integrated approach to healthcare.

Management also highlighted that its hospital has the potential to increase its capacity by adding two additional floors to its existing building. In the near term, it could relocate its corporate offices to increase bed capacity, if demand rises. We note that it is currently operating 200 beds of the 380 registered beds.

We reiterate our BUY rating on the stock, with a price target of S$1.30, which implies 23% potential upside. We peg our price target to 16.4x FY10E P/E, which is within the mean of RMG’s historical trading range.