In the current low interest rate environment, it’s easy for companies to go on a borrowing binge in order to fuel growth. But, such a strategy can be dangerous if interest rates start rising across the board – companies that rely heavily on borrowing may then find the burden of debt to be too onerous. In addition, such companies may find it hard to grow when easy credit dries up. In light of that, it may suit more conservative investors to focus on companies that have managed to grow their profits consistently while keeping clean balance sheets with…
In the current low interest rate environment, it’s easy for companies to go on a borrowing binge in order to fuel growth. But, such a strategy can be dangerous if interest rates start rising across the board – companies that rely heavily on borrowing may then find the burden of debt to be too onerous. In addition, such companies may find it hard to grow when easy credit dries up.
In light of that, it may suit more conservative investors to focus on companies that have managed to grow their profits consistently while keeping clean balance sheets with minimal or no debt. Here are two such companies.
1. Raffles Medical Group Ltd. (SGX: R01)
Raffles Medical is a healthcare provider which runs its flagship Raffles Hospital along North Bridge Road in Singapore. The company also operates a network of close to 80 multi-disciplinary clinics across Singapore, in addition to having an overseas presence in Hong Kong and Shanghai through four medical centres. The provision of healthcare insurance and the distribution of nutritional supplements and medical diagnostic equipment are also activities Raffles Medical is involved in, albeit on a smaller scale.
Despite seeing its profit grow by close to 700% since 2004, the company isn’t resting on its laurels. In Raffles Medical’s latest second quarter earnings release, the company highlighted the progress of its growth plans and here’s what I wrote about it:
“There are two key prongs to the company’s long-term growth strategy and that’s the extension of its Raffles Hospital and the construction of a medical/retail hub in Holland Village. That’s also where the aforementioned S$190 million was spent on – the company had to acquire the land needed.
Currently, Raffles Medical Group is finalising the development plans for Raffles Hospital which can potentially add 220,000 square feet to the existing 300,000 square feet of gross floor area for the hospital.
As for the medical/retail hub, construction for the 5-storey commercial building “is in progress”. The property will have 65,000 square feet of gross floor area of which 9,000 have been earmarked for Raffles Medical Group’s medical and specialist services. The development would also have DBS Bank as one of its larger tenants in addition to other “upmarket retail as well as reputable food and beverage tenants.””
The company has a laser focus on doing what’s best for its patients. That commitment has also given Raffles Hospital a great reputation: The hospital, which offers tertiary care, won the highest Customer Satisfaction ratings in the 2013 Customer Satisfaction Index of Singapore survey in the healthcare sector (Raffles Hospital had the second highest rating in 2012). The survey is carried out annually by the Institute of Service Excellence.
At its current share price of S$3.96, Raffles Medical does not come cheap with a trailing price/earnings (PE) ratio of 25. The market average, as represented by the SPDR STI ETF (SGX: ES3) – an exchange traded fund that tracks the Straits Times Index (SGX: ^STI) – carries a trailing PE of only 14.
2. Japan Foods Holding Ltd (SGX: 5OI)
Japan Foods runs Japanese-themed food & beverage outlets under 16 different brands currently. These brands, which are either franchised from Japan or developed in-house by the company, include Ajisen Ramen (franchised), Menya Musashi (franchised), and Fruit Paradise (developed in-house). The bulk of its restaurants are located in Singapore, though it also has a presence in Indonesia, Malaysia, Vietnam, Hong Kong, and China.
Since its listing in 2009, the company has expanded its total restaurant network from 32 to 59 (as of 31 March 2014).
Although some might question the wisdom of having a small company (Japan Foods has annual revenue of ‘just’ S$63 million and a market cap of S$107 million) manage that many different brands, Japan Foods actually views it as an advantage. In a July 2014 The Business Times article titled “Serving up multiple brands”, the company’s Chief Executive Kenichi Takahashi commented that “Customers and management (of shopping malls) are always looking for new brands.”
Thearticle also touched on how Japan Foods’ multi-brand approach allows it to occupy multiple units in the same retail mall, hence enhancing its bargaining position with landlords when it comes to the renewal of leases.
The company’s looking to expand its network and commented, in its latest earnings release for the second half of its financial year ended 31 March 2014, that it “expects its associated companies to continue to expand the “Menya Musashi” restaurant network in Hong Kong and China.
Shares of the restaurant operator are valued at 15 times earnings at its current price of S$0.615. That’s a valuation which is roughly in-line with that of the market average.
Foolish Bottom Line
The great historical business performances of the two companies have translated into market-beating returns for investors. Since the start of March 2009 (Japan Foods got listed only in late February in the same year), Japan Foods’ shares have gained 454% as compared to the Straits Times Index’s return of just 75%. With Raffles Medical, the healthcare operator has delivered capital appreciation of 989% since the start of 2004, leaving the Straits Times Index’s gain of 88% sorely in the dust.
However, it’s important to note here that despite the past successes of both shares, it isno guarantee that they can continue to deliver great returns and beat the market going forward. Investors interested in both companies would still have to come to their own conclusions after studying other important aspects of their businesses like their cash flow situation and the future trajectory of their respective industries.
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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 and Japan Foods Holding.