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Raffles Medical shares under siege!



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Since 2008, the shares of home-grown healthcare provider, Raffles Medical Group, went on a rampage bull run, rising from $0.56 to almost $5.00 in 2015. The mighty surge in share price had created much wealth for many of its long-time investors. Recently, the shares came under siege and experienced a serious loss of form.

Against the above backdrop, several readers wrote in to discuss about the outlook for this SGX stock. In this article, I will share some of my views and insights on Raffles Medical.

“I like RMG but, like you, have resisted at prices say 1-2 months ago. It would be really valuable if you could share what you feel a fair value or target price might be?” – Georgie

“Wonderful article! Agree with your point of view on the soundness of Raffles Medical. With reference to your article, I have 2 questions.

  1. Is there any particular reason or calculation that led you to the specific target price of $0.80 (or $0.60 in your previous article)? Assuming a similar profit, the PE ratio would be around 20, which is quite low for a healthcare stock, especially for RMG considering its stable growth.
  2. Given that the overall global markets seem inflated, and may undergo a correction, would you recommend keeping RMG during the recession (as a defensive stock) or to pull out your investments altogether to hold in cash and bonds?” – Huang JH

My view on Raffles Medical

First of all, there is a difference between fair value and target price. And you need to figure this out because otherwise you would never appreciate Warren Buffett’s “price is what you pay, and value is what you get”.

Simply put, target price refers to the entry price that an investor set on a stock. On the other hand, fair value refers to the more objective way of valuing a company, taking into consideration the assets and liabilities.

Of course, both target price and fair value are fundamentally subjective as most investors have different target price and fair value for the same stock. In my opinion, the most objective way of valuing a company is looking at the book value – the Net Asset Value (NAV). But then again, nobody purchases a stock based solely on the book value. You would need to evaluate the profit and losses, cash flow, balance sheet, market share, business outlook and management performance.

Raffles Medical’s latest NAV is about $0.40 per share. If you factor in the branding and network of medical centres, the fair value should be around $0.50, which was my target price for Raffles Medical shares a couple of years ago. But things have since evolved and I have subsequently revised my target price upwards to $0.80.

Raffles Medical

Target price upgrade

The reason for the target price upgrade is because of the completion of several milestone projects by Raffles Medical for the past two years. Among them is the completion of Raffles Holland V, a lifestyle mall that comes with multi-discipline medical centre. With this new asset, Raffle Medical now boosts a portfolio of investment properties worth a mighty $371 million as per FY2016. The rental income for last year was $4.3 million. With Raffles Holland V, the rental income is expected to increase substantially for this year.

Raffles Holland V is actually the Group’s second multi-discipline medical centre. Raffles’ first multi-disciplinary medical centre officially commenced operations at Shaw Centre on 23 July 2015, offering both local and overseas patients new location for premier healthcare services in Singapore.

But what I really like about Raffles Medical is its acquisition of International SOS (MC Holdings) Pte Ltd in October 2015. This acquisition has enabled Raffled Medical to become a regional healthcare provider with clinical facilities serving patients in thirteen cities across Asia. Already, the full year revenue for FY2016 was $42 million, far more than its Raffles Japanese Clinic which registered revenue of $17 million. Although MCH is still bleeding money, I expect the unit to be profitable in 2 to 3 years.

Hence, it is not true that Raffles Medical only started to venture overseas in recent years through its China hospital projects. In fact, the acquisition of MCH demonstrated that the home-grown healthcare provider already foresaw the current slump in Singapore’s medical tourism many years ago. As industry player, Raffles Medical had grab the bull by the horn and saw the need to venture out of Singapore’s small market.

Assessing Raffles Medical’s value

I don’t rely solely on P/E ratio when valuing a stock because I find this metric too narrow and does not provide the full picture of a company’s value and growth prospect. This is because when I review a company’s financial report, my first focus is always on the quality of balance sheet, followed by cash flow and then profit and loss statement.

Basically, P/E ratio fluctuates periodically and my view is that this figure may not justifies a company’s financial health. For example, based on my target price of $0.80, the P/E ratio would be 20. I agree that this is quite low for a healthcare stock, especially for RMG considering its stable growth. But then again, as of 23 August 2017, the P/E ratio was at 28. Is this reflective of Raffles Medical current and potential growth? So, in the stock market, anything can happen and never say never.

Raffles Medical’s business model basically allows it to have a very good operating cash flow. The net cash from operating activities enables the Group to fund business expansion and growth. Take for example, in the 2QFY2017 report, the net cash from operating activities was $26 million. The Group’s cash and cash equivalents decreased by S$7.0 million from S$119.4 million as at 31 March 2017 to S$112.4 million as at 30 June 2017. This was mainly due to dividend payment of S$5.5 million and payment of S$53.6 million for investment properties under development, partly compensated by strong operating cashflows generated by the Group and financing from bank loan.

Many analysts cited the RafflesHospital Extension as the culprit for the quarter’s high capital expenditure. But given that this projection is nearing its completion in the fourth quarter, this logic does not make sense to me. Instead, the capital expenditure should be for the construction of RafflesHospital Chongqing and RafflesHospital Shanghai. These hospitals are targeted to be operational by second half 2018 and second half 2019 respectively.

To be frank, I don’t mind company experiencing short term negative cash flow to support growth. To expand a business, there is always a need to invest and build for the future.

Raffles Medical outlook

As I am not a licensed financial planner nor a certified financial analyst, I don’t recommend stocks nor give financial advice to readers. Investors should ask themselves whether they are comfortable to hold Raffles Medical shares for the long term and whether this stock is aligned to their investment objective.

Fundamentally, this counter is not a dividend play as the dividend yield is terribly low, around 1.8%. But as a growth stock, management has done a good job in growing the company through various initiative over the years. Beyond growing its investment moat within Singapore, the management has made the right decision in growing its presence in Asia. In time to come, Raffle Medical should be a force to reckon in the region.

In conclusion, Raffles Medical has emerged the Great Financial Crisis well and the shares had an incredible bull run for the last eight years. Hence, even if there is another stock market correction on the horizon, I am pretty confident that Raffles Medical would weather the storm because of its strong balance sheet and prudent financial management. As a value investor, I see any market corrections as good opportunities to snap up the shares on the cheap.

Nonetheless, just to highlight that I am not, and have never, invested in this counter at all. Hence, I have no emotional baggage when writing this article. This article is mainly to share my views on Raffles Medical and should not be construed as an investment advice to buy or sell the stock. Investors should do their due diligence before investing in this counter. Till then, enjoy the ride.

Read my articles on Raffles Medical below:

  1. Raffles Medical share price
  2. Raffles Medical Group’s Return on Equity (ROE)
  3. Analysis on Raffles Medical Group
  4. Raffles Medical shares power ahead
  5. Raffles Medical Group stable growth
  6. Raffles Medical Group’s proposed stock split

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