Raffles Medical Group Ltd. SGX: R01

Raffles Medical Group Ltd. SGX: R01

Fundamental analysis

1. Understanding the business

Raffles medical is a private group (non-governmental) offering a wide range of healthcare-related products and services. While extremely diversified, it is also simple, straightforward, clean and understandable. It has medical clinics that deal with common ailments, hospitals that have specialists to treat perhaps more severe cases and the group also extends to dental and Chinese medicine. 

2. Does the company have any barrier of entry, which makes it very difficult for competitors to penetrate the company’s market share?

Brand name – almost everyone in Singapore knows of raffles medical and it also has built a reputation for itself throughout the years. As for customer loyalty, most people do not tend to hop from clinics to clinics (or hospitals) each time they fall sick. Usually healthcare centers tend to keep a past record of client’s condition so it is also easier for a patient to return for future consultations.

Likewise in many other countries, one of the main ‘competitor’ of sorts that has an impact on the profits of a private medical group is the government’s healthcare. They are heavily subsidized and most people will prefer going to government healthcare places. Recently the government also introduced several benefits such as the pioneer generation card and the Community Health Assist Scheme (CHAS) card. These further adds to bring patients away from seeking private healthcare.
  

In Singapore, its current competitor is Parkway Pantai, which operates a host of hospitals here, including mount Elizabeth and Gleneagles, both fairly well known. However, they do not have much diversification in the other healthcare sectors.

For this section, I feel that raffles medical do not have any strong resistance in maintaining or expanding their group as the various healthcare groups in Singapore all have their own specialty and their group of customers. 

3. Does this business operate in a non-exciting industry?

I am not an expert myself so I wouldn’t say that the medical sector is exciting or not. However I do know that common ailments such as cold and flu have been around for a long time, and there isn’t any breakthrough technology in treating them yet. In the more advanced sector, there might be new technologies invented or discovered time to time but I feel that the majority of the revenue from healthcare groups should come from what they are usually doing.

4. Was the company successful in a couple of locations before expanding nationally?

Quoted from the group’s website:

‘Founded in 1976 with two clinics in central Singapore, RMG has grown consistently over the years.  Today, RMG serves over two million patients annually and more than 6,500 corporate clients including local and multinational corporations and government agencies’

(https://www.rafflesmedicalgroup.com/raffles-medical-group/our-group/about-us/our-heritage#sthash.Ca6Cv0Cz.dpuf)

They have also managed to expand overseas and have hospitals in Hong kong. From their history, we can see that their growth is very good, even incorporating various aspects of healthcare such as dental, TCM, healthcare insurance and even educational healthcare institutes.

5. Has the company dominated in a particular segment of the market?

As discussed above, the company did not dominate in a particular segment of the market. Its wide spectrum of services all has their own, albeit minor, competitors.

6. Is this company operating in a hot industry?

Nope, unless some kind of plague or pandemic hits the world again.

Financials

7. What is the company’s earnings growth over the previous 10 years? Does it grow constantly?

Year	EPS (cents)
05	2.96
06	3.78
07	7.23
08	6.02
09	7.22
10	8.51
11	9.36
12	10.42
13	11.58
14	11.96
15	TBA

That gives us an earnings growth of 24.57% for 10 years. It is also good to take note of the 2008’s financial crisis that only caused a slight drop in EPS, which they then recovered from.  It also has a smooth upwards trend which is very feasible. The company scores very well in this section.

8. Retained earnings

Retained earnings of Raffles medical group  for the past 10 years = 70.94 cents = $0.7094

Change in market price of the stock from 2005 to 2014 (dec) = 3.90 – 0.50 = $3.40

3.40/0.7094 = 4.792

Each dollar retained by raffles medical would potentially* generate $4.792. This number is excellent.

*The word potentially is used as retained earnings had not hit $1.

 9. Owner income

Owner earnings = net income + depreciation and amortization – capital expenditure

Year	Net income /profit after tax ($’000)	Depreciation and amortization($’000)	Capital expenditure($’000)	Owner earnings($’000)
2005	12,038	3,053	5,757	9,334
2006	15,767	3,374	2,300	16,841
2007	35,924	4,220	4,286	35,858
2008	31,660	6,618	6,145	32,133
2009	38,033	6,891	3,892	41,032
2010	45,482	6,935	5,452	46,965
2011	50,621	7,240	114,543*	-56,682
2012	57,209	7,903	10,937	54,175
2013	85,295	8,268	9,108	84,455
2014	81,281	9,646	209,152*	-118,225

*In 2011, spike in capital expenditure can be accounted to the purchase/extension of units within raffles hospital, thong sia building and Samsung hub.

In 2014, the spike can be accounted to the purchase/extension of units within raffles hospital extension and Holland village. (Details can be found under financial report – investment properties)

From the data shown, owner income is rising steadily for the past 10 years, excluding the investment of properties. Net income is also rising steadily which is a good sign. In the financial crisis of 2008, there also isn’t much drop of owner earnings which is a good trait we should be looking out for.

10. Company’s current ratio

Current assets / current liabilities for year 2013:

573,435/99,642 = 5.754

Current assets / current liabilities for year 2014:

655,027/114,755 = 5.708

The company is in extremely good standing in terms of ratio. They will have no problems paying off existing debts. Even excluding receivables into calculation, the company’s current ratio is well above 1. This result is excellent.

11. Return on equity

Raffles Medical Group Ltd (SGX:R01)

Return on Equity

11.26% (As of Jun. 2015)

Dec05	Dec06	Dec07	Dec08	Dec09	Dec10	Dec11	Dec12	Dec13	Dec14
11.52	14.26	22.87	14.93	16.06	16.88	16.25	15.74	19.72	13.38

Every year’s ROE is very good, although it does show signs of a downward trend.

12. Gross profit margin, does it grow or at least maintain?

Gross profit margin is defined as net profit/revenue expressed in %.

Year	Gross profit margin %
2005	87.86
2006	87.65
2007	88.51
2008	82.29
2009	81.45
2010	81.56
2011	81.13
2012	80.39
2013	81.56
2014	80.20

While there is an obvious downward trend, the gross profit margin % is extremely high, which means that most of the company’s revenue results as profits. This is a good trait as it shows that the company is not spending excessive money to undercut its competitors, advertising or other competitive money wastage.

13. Return on assets, does it grow or at least maintain?

Dec05	Dec06	Dec07	Dec08	Dec09	Dec10	Dec11	Dec12	Dec13	Dec14
9.03	10.84	16.58	10.66	11.71	12.78	12.59	12.32	15.90	11.01

Return on assets is defined by the net income generated compared to invested asset. This can also be a factor to determine how ‘smartly’ the company is using its funds for.

As we can see from the data, the average ROA is 12.34% for the past 10 years. This is a great value. A company with high ROA like this will reward shareholders in the long run. The ROA values are also rather stable without many fluctuations.

14. Dividends payout ratio

Dec05	Dec06	Dec07	Dec08	Dec09	Dec10	Dec11	Dec12	Dec13	Dec14
				0.35	0.59	0.37	0.39	0.30	0.46

The dividends payout ratio is extremely little. This means that only a small part of the group’s profit is used to pay back shareholders as dividends. However, this value shouldn’t be confused with the YIELD. For years of 2005 – 2008, the payout ratio is not stated clearly but is still within the ranges of <1 from financial report data.

15. Shares buyback

The group has not done any shares buyback that is known of.

16. Others / personal opinion  

The majority of shares (38.33%) are held by raffles medical holdings (its parent company) and Mr Loo Choon Yong (10.11%), the co-founder of raffles chain of healthcare. These shows align of interest between shareholders and the management of the company, which is a good sign. This means that there are no threats of hostile takeover for the company.

Given the dividend YIELD of the group is in the 1-3% rate, compared to the payout ratio. This is a very good yield given how little the company is paying out its profit as dividends. Since this is a growth company/stock, the payout ratio is to be expected as the company is using most of its funds for expansion both locally and overseas. With the past expansion history of the company, it can be said that the management and vision of the company is quite good in terms of expansion, and as shareholders we should take it as a good sign that the company is holding most of the profits for expansion instead of giving it out as dividends/share buybacks.

However, the price/book ratio of 4.386 is extremely high. The P/E ratio of 36.817 and growth rate of 24.57% shows a PEG value of 1.49. These numbers shows that the company is currently overvalued and/or investors are expecting much growth from the company. Given the past records of the company, although it is currently overvalued, it is starting expansion into various countries and if successful, the company true value might reach its expected value soon and will probably continue to grow from there. The only factor that isn’t showing a buy signal is its overvaluation. I feel that the stock price will be heavily guided by whatever is happening in the current expansion to china and Japan, should the expansion take off, the book value will reach the trading value soon enough, with only the risk of failure of expansion which will definitely take a toll on the company’s revenue/monies and ultimately stock price.

IMO: 7/10