What’s Behind This Company’s 65% Rise in Share Price in 2 Years?

It’s often said that there are two things in life which are certain: death and taxes. Allow me to add a third option – illnesses. Thing is, falling sick is such a natural part of our lives and because of that, healthcare providers are said to have defensive businesses because people still need the doctor regardless of how well the economy is doing.

Raffles Medical Group (SGX: R01) is one such healthcare provider. Over the past two years, the company has been a solid market beater, gaining 65% to its current price of S$3.87. The Straits Times Index (SGX: ^STI) in comparison, has managed to move up by just 9.4% to 3,290 points currently.

What might be behind the company’s strong share price performance and can it continue?

The business

Raffles Medical Group was established almost forty years ago in 1976 with just two clinics in central Singapore. Over the years, it has grown consistently and today, it runs a network of 78 multi-disciplinary clinics in Singapore and four medical centres in Hong Kong and Shanghai. The company also provides other ancillary healthcare-related services such as offering healthcare insurance and the development and distribution of nutritional supplements, vitamins, and medical diagnostic equipment. These activities are mainly classed under Raffles Medical Group’s Healthcare Services segment.

The company has one other main operating segment known as Hospital Services and that’s where the results of its flagship Raffles Hospital are reported under. The hospital, located along North Bridge Road in Singapore, offers tertiary care and first opened its doors in 2002. As of 2013, Hospital Services accounted for 63% of Raffles Medical Group’s total revenue while Healthcare Services contributed 34%.

Raffles Medical Group’s co-founder Dr. Loo Choon Yong once gave a telling sound-bite regarding the culture of the company. He said:

“We have a little aphorism of our own – “look after the patients and the business will look after itself.” I preach this all the time because we should do what is the best for our patients.”

Doctors, nurses, and everyone else within the company have likely taken Loo’s aphorism to heart, judging from how Raffles Hospital has been well-received amongst patients. For instance, in the 2013 and 2012 Customer Satisfaction Index of Singapore survey carried out by the Institute of Service Excellence, the hospital scored first and second spots respectively in Customer Satisfaction ratings in the healthcare sector.

The numbers

A focus on patients’ well-being is what has likely helped to contribute to the company’s stellar financial performance over the past decade. As seen in the table immediately below, profit at the company has shown remarkably consistent growth since 2003:

Year Earnings per share (Singapore cents)
2003 1.89
2004 2.21
2005 2.74
2006 3.50
2007 7.36
2008 6.10
2009 7.30
2010 8.65
2011 9.50
2012 10.5
2013 15.4
Last 12 months 15.6

Source: S&P Capital IQ

Although the provision of healthcare might be considered a defensive business, it does not mean that a company that belongs would do well just because it’s part of the industry; a healthcare service provider would still need capable management to run the ship well. A comparison of the historical earnings performance between Raffles Medical Group and some of its industry peers – Healthway Medical (SGX: 5NG), Singapore Medical Group (SGX: 5OT), and Pacific Healthcare Holdings (SGX: P47) – would prove the point:

Net profit margin
Year Raffles Medical Healthway Medical Singapore Medical Pacific Healthcare
2007 21.0% 13.1% 33.0% 7.63%
2008 15.7% 11.8% 16.6% -14.4%
2009 17.3% 15.5% 5.17% -12.4%
2010 18.9% 3.27% 6.72% -15.9%
2011 18.5% -81% -3.62% -32.0%
2012 18.2% 9.29% -5.11% -16.9%
2013 24.9% 37.9% -28.1% -16.2%

Source: S&P Capital IQ

The catalysts

Raffles Medical Group had first announced its plans to open hospitals in two Chinese cities, Shanghai and Shenzhen, in February 2013 and September 2013 respectively. Till date, there’s nothing concrete on that front, so investors can only wait and see. That said, China had recently announced healthcare reforms which might help grease the process a little for Raffles Medical Group when it comes to opening hospitals in the country.

As for more concrete plans, the company had purchased a plot of land just adjacent to Raffles Hospital in a bid to expand its premises. The company’s awaiting final regulatory approval, but if that goes well, Raffles Hospital could see its floor area expand by almost three-quarters from 28,605 square metres to 49,217 sqm.

Meanwhile, the company’s also redeveloping a piece of real estate in Holland Village, Singapore. The end product would be a 5-storey commercial building that would house medical and specialist services (this would take up roughly 9,000 square feet of space), banking facilities, and retail and food & beverage outlets.

Foolish Bottom Line

At its current price of S$3.87, shares of Raffles Medical Group do not come cheap: the company’s shares are valued at 25 times trailing earnings and that’s almost three-quarters higher than the Straits Times Index’s PE (price/earnings) ratio of around 14. So, valuation risk is something investors would certainly have to keep in mind.

The other pertinent issue is succession risk: The company’s leader, Loo, is already in his mid-sixties. In 2010, he mentioned that the company is building its management succession that could lead the firm to grow for another 35 years. He said:

“We are growing our timber and we recruit young people.

The best way for Raffles to carry out succession is not by parachuting somebody from the sky, but by bringing good people to work together, because the whole philosophy and culture is about team-based practice.”

The above is great for investors to know. But, leadership changes can often rock the boat of even the steadiest companies and that is something investors ought to think through carefully.

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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.