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Raffles Medical Group’s Return on Equity

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On 24 April 2017, Singapore’s leading private healthcare provider, Raffles Medical Group, announced that it is developing its second international tertiary hospital in China.

When completed in 2018, RafflesHospital Chongqing will be able to serve local and expatriate patients in the western part of China as well as foreign patients from Central Asian republics. Meanwhile, construction of RafflesHospital Shanghai has commenced and is proceeding smoothly.

For the past few years, Raffles Medical Group has been building its investment moat by increasing number of clinics, expanding its flagship hospital in Singapore, refurbishing existing clinics, acquiring overseas medical centres and developing new hospitals in China. Clearly, its intention is to grow into a regional healthcare player in order to capture market share.

Raffles Medical

Raffles Medical Group’s key competitive advantage is that its strong operating cashflow enabled the Group to support its various investments. This means that its existing operation activities are able to generate enough cash to fund business growth. For 1Q2017, the Group maintained its strong cashflow from operating activities of S$18.2 million in Q1 2017. This figure is more than sufficient to meet the investment and capital expenditure of $14.4 million in Q1 2017.

The need for overseas expansion is driven by the small market in Singapore. Reports of medical tourism slowing down in Singapore started to surface in early 2016. Apparently, Singapore Tourism Board stopped providing market data for medical tourism since 2015 but industry players have pointed out that neighboring countries such as Thailand, Malaysia and Indonesia have stepped up their game in recent years to compete with Singapore in this arena. Basically, private medical players in Singapore, such as Raffles Medical Group, have priced themselves out of the market.

In view of the bearish market sentiment, Raffles Medical Group share price has been falling and as of late June 2017, the price is languishing at 52 week low. The Price/Book ratio stands at about 3.4 while Price/Earning ratio is a staggering 33.3. The data seem to suggest that this counter may be overpriced at the moment. Thus, the correction is likely to continue and the stock price is expected to be bearish going forward.

One of the key metrics to assess management’s ability is the Return on Equity (ROE), which measures how efficient a company deploys the shareholder capital to generate returns. Over the years, Raffles Medical Group’s ROE has been declining. From a high of 14.6% in 2012, the ROE has consistently declined to 10.5% in 2016. The reason for the ROE drop is because Raffles Medical Group chose to retain the earnings instead of re-investing the profits to fund future growth. As a result, equity base has been increasing for the past few years.

While the ROE has been declining year-on-year, the management has been able to grow the revenue steadily from $311.6 million in 2012 to $473.6 million in 2016. Profits have also been increasing steadily, from $56.8 million in 2012, to $70.2 million in 2016. Hence, I am not alarmed by the declining ROE figures because the company is still growing healthily.

Indeed, Raffles Medical Group’s approach has always been to grow prudently. With presence in 13 cities in Asia and serving more than 2.2 million patients through more than 100 clinics, the group is well positioned to ride out the current challenging economic outlook. 2016 was a milestone year as Raffles celebrated their 40th anniversary and also achieved a record revenue of $473.6 million for the year ended 2016 with all divisions contributing positively to the growth of the Group.

Two significant developments are expected to boost Raffles Medical Group’s profits in 2017. Firstly, Raffles Holland V mall is expected to bring in rental income. Already mall achieved about 95% committed occupancy prior to its official opening. Nestled in an intimate setting, the diverse mix of tenants from Basement 1 to Level 5 provides a wide and unique range of food and beverage, beauty, fitness, and lifestyle offerings.

Secondly, Raffles Hospital’s new extension building has been progressing smoothly, and is slated to be completed in fourth quarter of 2017. The new 20-storey extension building with two basements will yield a gross floor area of about 220,000 square feet at a total estimated cost of $310 million.

Due to the completion of the two milestone projects, I expect fourth quarterly results for Raffles Medical Group to be spectacular. I also like Raffles Medical Group for its scalable business model – opening of new clinics to increase touch points with patients. In this aspect, the Group continues to grow its investment moat in 2017 by opening a new clinic at Hillion Mall. Existing clinics at Asia Square, Clementi and Nex will be refreshed in Q2 2017 to serve patients better.

The next phase of growth for Raffles Medical Group will be supported by the two hospitals in China. However, investors must be wary of the execution risks in overseas projects which may not be runaway successes. Various factors like regulations that are not business friendly and different customer trend may impact Raffles business in China. Hence, investors should calibrate expectations and view the hospital projects in China as long-term investments that provide learning experiences for the management.

In my point of view, Raffles Medical Group is considered a growth stock which is going through a rough patch at the moment. While the completion of Raffles Holland V mall and RafflesHospital extension are expected to bolster the full year financial results, the share price is very sensitive to the economic climate. As such, I expect the correction to continue and would probably enter this counter at $0.80. Till then, enjoy the ride.

Read my articles on Raffles Medical below:

  1. Analysis on Raffles Medical Group
  2. Raffles Medical shares power ahead
  3. Raffles Medical Group stable growth
  4. Raffles Medical Group’s proposed stock split

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