On 20 February 2017, Raffles Medical Group announced a record revenue of S$473.6 million for the year ended 2016, demonstrating its ability to maintain growth amid challenging economy. The result was impressive because it presented a 15.4% growth from 2015, driven by positive contributions from all business divisions.
Raffles Medical Group is one of my favorite stocks which I am not vested in but am constantly monitoring its progress for future investment purposes. Being one of the leading private healthcare service providers in Singapore, this company sets itself apart from the rest of its competitors with its strong investment moats.
Raffles Medical boosts RafflesHospital as its flagship, offering a wide range of specialist medical and diagnostic services for both inpatients and outpatients. RafflesMedical clinics form one of the largest networks of private family medicine centres in Singapore while RafflesDental is a team-based dental group in Singapore comprising of a specialist dental practice at Raffles Hospital and a network of general dental clinics. RafflesHealthinsurance provides healthcare insurance to corporate and individual clients.
However, Singapore market is too small and with local competition heating up over the past few years, it is inevitable for RMG to expand overseas to seek growth. After all, with so many players from the public and private sectors, how many Singapore patients can RMG rely on to spur growth?
The Group’s acquisition of 55% equity interest in International SOS (MC Holdings) Pte Ltd (MCH) for a cash consideration of $32,661,000 in 2015 elevated it into a regional healthcare provider with clinical facilities serving patients in thirteen cities across Asia. This is a strategic move that resulted in the 15.4% revenue growth seen in 2016. Excluding the revenue contribution from MCH, the Group’s revenue would have grown by only 7.5%.
Scaling for growth
One thing about the Singapore healthcare sector is that it is heavily regulated (for good reasons too), thus this represents a high entry-barrier for many new entrants. But the business model is also scalable through opening or acquisition of clinics. Raffles Medical’s management clearly leverage on this and make it into a significant competitive advantage.
In 2016, RafflesMedical opened new clinics in Bukit Batok Central, Fragrance Empire Building, Our Tampines Hub, and Waterway Point while existing clinics in Bedok North, Bishan, Clementi, Compass One, Loyang Point, Northpoint, Rivervale Mall, and Toa Payoh were refurbished and expanded to meet growing patient needs. In 2017, RafflesMedical will further expand its network with new clinics in Hillion Mall and Changi Airport Terminal 4.
Raffles Holland V mall opened on 21 October 2016 and will contribute significantly to Raffles Medical Group results in the coming year. The mall reflects the Group’s new initiative of locating comprehensive healthcare services with other lifestyle attractions in prime suburban regions. The five-storey mall is located adjacent to the Holland Village MRT station.
All eyes are on the RafflesHospital Extension project, which is progressing according to schedule. Much attention has been focused on this project because RafflesHospital is the flagship of RMG and its completion will allow RafflesHospital to further increase its breadth and depth of clinical services. When completed by the second half of 2017, it will contribute an additional 220,000 square feet of gross floor area to RafflesHospital.
Broadly speaking, the past few years for RMG have been a period of building for the future and FY2016 was no different. As a result, expenses incurred from investing activities have led to a profit decline of 1.6%. Profit decreased from $69 million in 2015 to $67.9 million in 2016. The expansion of the business operations led to the recruitment of more healthcare professionals and hike the expenses. Depreciation also increased mainly due to addition of plant and equipment resulting from the acquisition of new subsidiaries.
Notwithstanding the record revenue of $473.6 million achieved in FY2016, the management should put in more effort to rein in operating costs so as not to hurt bottom line.
The bright spots for FY2016 were the healthy balance sheet and strong operating cash flows. Raffles Medical continued to maintain healthy cash position of S$109.0 million due to positive operating cash flows from its various business units, and after accounting for payment of S$15.0 million for capital expenditure and investment properties, as well as distribution of interim dividends of S$8.9 million. With this war chest, RMG can certainly embark on more merger and acquisition activities to enhance growth.
As Raffles Medical expands its overseas operations, the company is also hurt by foreign currency volatility. In fact, for FY2016, the foreign exchange loss was $566,000 and foreign currency translation differences amounted to a loss of $4 million.
The 400-bed Shanghai hospital announced in 2015 might pose some execution risks because it is the first hospital for RMG outside of Singapore. The hospital is slated to be completed by 2018.
The biggest risk should be the decline of medical tourism in Singapore as a result of players stepping up their game in regional countries like Thailand, Indonesia and Malaysia. For only a fraction of the cost incurred in Singapore, patients can receive a much cheaper rate in these regional countries. To tackle this, costs must come down but this is not something that Raffles Medical can influence.
I continue to like Raffles Medical for its resilience growth and pipeline of growth initiatives. The key revenue drivers in the coming years will be RafflesHospital Extension, Raffles Holland V mall and MCH. These projects are expected to push the company to another level among its competitors and cement its investment moats as a premium health care service provider.
This company has positioned itself well by growing its local portfolio and spreading its wings in overseas investments. However, in view of the risks, I would only enter this stock at $0.60 to provide some amount of safety margin.
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