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This Share Has Increased By 469%: Can It Continue?

Raffles Medical Group Ltd. (SGX:R01) has been a big winner over the last five plus years. The share price for the company has risen 469% from 1 Jan 2009 to the closing price yesterday. By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was around 77% for the same duration. The healthcare provider has also paid out a total of 20 cents in dividends over the past five financial years. My fellow Fool Ser Jing wrote more about the company’s dividend track record here.

While the returns from Raffles Medical has been healthy — as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price.

A closer look

RMG graph 1

 

 

 

 

 

 

 

 

 

Source: Company Earnings Report

The business of Raffles Medical can be divided into three major business divisions. The first one, Hospital services has been the largest contributor of revenue for the past five years. The Hospital services division includes its flagship hospital and specialist medical services. For 2013 (the financial year matches the calendar year), the division made up around 63% of its total revenue. The Hospital services division has grown by 67.7% over the past five financial years.

The Healthcare services division includes its medical clinics, health insurance, and consultancy. It also deals with the trading of pharmaceutical products, nutraceutical products, and diagnostic equipment. This division contributed 34% of its revenue for 2013, but grew at the slower rate of about 39% over the past five financial years.

Ideally, we would like to see profit rise together with the revenue increases. For that, we look into the profitability of the business segments.

RMG graph 2

 

 

 

 

 

 

 

 

 

Source: Company Earnings Report

The importance of the Hospital services division is highlighted in the comparison of profit (before tax). This division provided 73.5% of Raffles Medical’s total profit (before tax). This is substantially more than the 13.7% contributed by the Healthcare services division.

Despite the lower profit contribution, the Healthcare services division plays a critical role within the company. In a speech made on 28 September 2013, Chief Corporate Officer for Raffles Medical, Dr. Prem Nair also stressed on the key role of the network of clinics which acts as a feeder for its main hospital services and specialist centres. The size of the clinic network also enables the company to secure more corporate clients for its services.

Finally, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at the cash and debt development.

RMG graph 3

 

 

 

 

 

 

 

 

 

Source: Company Earnings Report

Overall, the healthcare provider has been net cash positive for the past five financial years. For 2011, its cash position sharply dropped mainly due to a purchase of properties amounting to $109.5 million. On the other hand, its cash position swelled to $261.2 million as of 31 December 2013 due to proceeds from the disposal of a subsidiary for $119.2 million.

A quick look ahead

During the earnings report for the second quarter of 2014, Raffles Medical Group shared its plan to use up 9,000 square feet of its Raffles Holland Village facility (total gross floor area of 65,000) for expansion of its medical and specialist services. The rest of the property will be leased to DBS Bank, and other upmarket retailers as well as reputable food and beverage tenants.

In January 2014, the flagship RafflesHospital acquired an adjacent 1,978.1 square meters plot of land near its current location. The company has earmarked the site for development of new medical centres, additional beds, and training.

In addition, in June 2014, a new 3,000 square feet medical centre was also opened in the Marina Bay Financial Centre with a host of healthcare services from dental to radiology.

Finally, its network of clinics has also helped the healthcare provider clinch a contract with the Civil Aviation Medical Board in April 2014. More thoughts on the addressable market for Raffles Medical were also shared by my fellow Fool Ser Jing.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

When we look at the multiple plans that Raffles Medical has in place, we can see that the company is laying the foundation for growth into the future. It has plans to expand the reach of both its Hospital services and Healthcare services network. The Hospital services revenue and profits may be where we want to keep our Foolish eyes on for the future growth of the company.

As of yesterday’s close, Raffles Medical trades at a higher price-to-earnings ratio of 25 and has a dividend yield of 1.4%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.