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Raffles Medical Group Ltd. Set For Healthy Expansion

Healthcare provider Raffles Medical Group (SGX: R01) announced earlier this morning that it has agreed to purchase a plot of land from the Singapore Land Authority for S$105.2m.

This is the company’s second major acquisition after it announced last month it would be spending some S$120m in total to buy and develop a property located at 100 Taman Warna, Singapore.

The land in question in the latest acquisition, with an area of 1,978 square metres (sqm), is located just beside the company’s eponymous Raffles Hospital at North Bridge Road, Singapore. With a plot ratio of 5.6 times, the piece of land would ultimately have a gross floor area of 11,078 sqm.

Currently, Raffles Hospital has a gross floor area of 28,605 sqm, which can be expanded by an additional 9,535 sqm. With the new piece of land, the company’s healthcare facilities at North Bridge Road can reach up to 49,217 sqm. Both Raffles Hospital and the acquisition target have 99-year leases that started on March 1979, meaning to say the company has another 64 years or so to utilise the real estate.

According to RMG’s press release regarding the acquisition, the expansion offers “a strategic opportunity [for Raffles Hospital] to expand its facilities and services synergistically, and to naturally develop a comprehensive and integrated medical complex.”

Loo Choon Yong, executive chairman and co-founder of the company, commented on the acquisition: “The proposed extension will offer a runway for the hospital’s expansion and growth for the next 10 years, and contribute to Singapore’s vibrancy as a medical hub by offering integrated facilities and services for healthcare services, life sciences, research and teaching.”

RMG also shared some of its plans with the expansion in its press release. For instance, the hospital’s education and clinical research activities can be expanded, and help support the training and development of the skilled healthcare employees that the company requires.

In addition, Raffles Hospital also has plans to “develop a number of centres of excellence, such as for cancer, heart diseases, infertility and spine and joints.” These centres will work together with their international peers as and when needed to bring in relevant skills, knowledge and technology to help improve the hospital’s services.

The company has estimated that it would spend a total of S$310m in developing the new plot of land with a construction period of 24 months. On the payment front, RMG has said that it would be funding it with a mixture of its own cash and bank borrowings. The company’s latest financials show it having S$146m in cash with only S$4.4m in debt.

While RMG’s balance sheet would weaken as it would need to take up loans for this acquisition – in addition to having to spend around S$120m for the afore-mentioned purchase and development of a property at 100 Tarman Warna – the debt-situation would likely not spiral out of control due to the company’s strong operating cash flows, which comes in at S$87m in the last 12 months.

The company mentioned in its last earnings release that it would be facing tougher competition due to new public and private hospitals being developed in Singapore and the region. There’s also no shortage of competitors in the healthcare space with companies like Healthway Medical Corporation Limited (SGX: 5NG), IHH Healthcare Berhad (SGX: Q0F), and Pacific Healthcare Holdings (SGX: P47) among others.

Historically, these competitors have had much more volatile profit margins as compared to RMG’s, which has not fallen below 15% from 2007-2012. This is a clue on the latter’s stronger operational excellence as compared to its peers.

But, if the competition does heat up and RMG’s profit margins get squeezed, what seems like great avenues for future growth in the two recent acquisitions made by the company might not pan out well after all.

All told, investors have to be aware that it’s not a given that these ventures would be a success and their progress is something that needs to be watched.

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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 writer Chong Ser Jing owns shares in Raffles Medical Group.