Tug-Of-Fools: Raffles Medical Group – The Bull Argument

I am Choo Hao Xiang. Here is my bull case for Raffles Medical Group (SGX: R01).

If you think that defensive stocks are boring, think again. Stakeholders of RMG would definitely frown at that judgement. Since the firm was listed in 1997, it has been yielding a respectable compounded annual growth rate of 12 percent over a period of 16 years. If you include dividends, that bumps the return you get up by another percentage point.

It is really not that surprising when you look at the factors that have investors glued to the largest private group practice in Singapore. For one, RMG, which has been in the business for close to four decades, has an established brand name. People often associate the Raffles brand with quality medical care via a patient-centric approach. This presence itself forms a barrier to entry, not forgetting the capital-intensive nature of the healthcare industry.

The next noteworthy point is the fully integrated healthcare model that RMG runs. Offering the entire spectrum of primary, specialist and tertiary care enables the firm’s two business segments – healthcare and hospital services – to complement each other. This is made possible by its vast local network of 78 clinics and its flagship facility, Raffles Hospital. Synergies in the form of stronger patient load and economies of scale due to the ability to share data are some of the benefits of such a model.

Proven Track Record

Drawing reference to RMG’s financial performances the past 10 years, a graph tabulating RMG’s profitability ratios is presented below. For a more consistent comparison, one-off gains such as disposal and revaluation gains are omitted. All three indicators – operating, pre-tax profit and net profit margins – are trending upwards. That means good cost control measures are in place, which is positive news as the company would be able to translate more of its revenue into earnings. Among its regional peers, RMG has the highest recurring net profit margin at 17.8 percent, compared to the average of 11 percent.

Profitability Indicators For Last 10 Years

Source: Company’s Report

 Net Profit Margin

Source: Company’s Report; Net Profit Margin Based On Latest Full Year Results

 Let us go another step further to ascertain the financial health of RMG. A closer look at the company’s cash flow statements would tell you that net cash inflow from operating activities has been constantly eclipsing net profit, barring the latest full year results where net profit included disposal gain of $20.4 million. RMG’s free cash flow, which takes away cash needed for sustainable operations, also closely matches its net profit. This points to the consistent “high-quality” earnings profile as well as the strong cash-generating productivity RMG has. In fact, the firm recently posted its fifth successive record performance for the year ended 31 December 2013.

Catalytic Developments

By now, many would have already heard about the expansionary initiatives RMG is taking to sustain its growth for the next decade. The extension to its Raffles Hospital facility and a new centre at Holland village were music to the ears of stakeholders, just when they were wondering what plans the company had in mind for its huge war chest. For the period ended 31 December, cash made up nearly half of its total assets while its debt-to-equity ratio was 0.01. When the new developments come onstream in 2016, its status of a leading healthcare services provider will be fortified while RMG will be presented the opportunity to boost its bed capacity at the same time.

Furthermore, tweaks to Medisave and the Community Healthcare Assist Scheme (CHAS) that seek to narrow the gap in cash outlay between public and private care, will benefit RMG too. Majority of RMG’s extensive clinic network is registered under CHAS.

Another plus point is the optimism surrounding its China venture. According to the management, the discussion on the joint ventures to establish two hospitals in major first-tier cities Shanghai and Shenzhen in China, is expected to conclude late 1Q14. If successful, this will open up another income stream as well as further diversifying the income base for RMG.

With the organic growth and overseas expansion plans in place, it seems like RMG is not only nursing its patients back to the pink of health, it is keeping itself in that state now and for the future.

You can read the bear argument here.

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