Businesses in the Haze

Haze The talk of the town for the past few days has been how hazardous the haze has become. N95 masks are selling out fast. People are encouraged to stay indoors. The Pollutant Standard Index (PSI) seems to be on a bull run whereas the Straits Times Index (SGX: ^STI) seems to be in doldrums. At the time of writing, the PSI hit an all-time record of 400!

What are some of the businesses that will be affected, both positively and negatively, by the Great Singapore Daze, I mean, Haze?

Raffles Medical Group Limited (SGX: R01) seems to be getting some respite, despite the haze. No surprises there. More people will be visiting doctors for respiratory problems. An analyst report by CIMB showed that during his “walk-about to two clinics and quick chats with staff suggest that volume for outpatient treatment had risen by nearly 50%”. The business is resilient, since it is in the medical industry. It is highly free cash flow generative. The cash from operations for December FY2012 was S$69.5 million with capital expenditure only at S$9.7 million. The net profit margins for FY2012 was 18.2%. The ROE is at 14.6%, with negligible debt. The PE ratio of Raffles Medical is now 29.

On the other hand, a few businesses might be affected negatively by the haze. Sales for outdoor restaurants might dwindle in the short-term. Travellers would not want to travel into Singapore or to the neighbouring countries till the haze subsides. Lesser travellers would mean that the hotel businesses will be affected as well.

Singapore Airlines Limited (SGX: C6L), SIA and Tiger Airways Holdings Limited (SGX: J7X) are the two listed airline operators in Singapore. The businesses might be affected, in the short-term, if the haze persists till the dry season in Indonesia is over in September.

Airline businesses are generally capital-intensive. SIA announced in end May 2013 that it will spend S$21.4 billion to buy 60 new mid-sized jets, making it the biggest announcement of aircraft orders in the SIA’s history. The cash flow from operations for March FY2013 was S$1.9 billion. The capital expenditure was also S$1.9 billion. Thus, there was no free cash flow for FY2013. With the capital expenditures set to increase, the free cash flow might be further affected. This will in turn affect the dividend paying abilities of SIA.

Foolish Bottom Line

Since there is a short-term catalyst for Raffles Medical in the form of more patient load, the stock price might rise. However, investors must do due diligence and still look at the long-term prospects of the business. They have to ponder, “Will the business continue doing well despite the haze?” The same goes for restaurants, airlines and hotels. Such stocks might take a hampering in the short-term. We need to discern if the short-term hampering of stock price presents opportunities to purchase such companies with a margin of safety, if and only if, the business is fundamentally sound to begin with.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.