This Stock Has Gone Up Around 170% for the Past Five Years. Can it Continue Doing Well?

Shares of Raffles Medical Group Ltd. (SGX: R01) have grown 168.3% from the end of 2009 till 26 December 2014. Over those past five years, the company’s gains have trounced the returns of the Straits Times Index (SGX: ^STI) by more than 10 times.

Raffles Medical prides itself as the largest private medical group practice in Singapore. It has a trusted brand with a huge network of clinics, hospitals, surgical centres, specialty units, and medical laboratories around the island. It boasts a long list of corporate clients as well.

It is no surprise that Raffles Medical’s shares have done well in the medium-term. Revenue at the firm has grown consistently from S$219 million in 2009 to S$341 million in 2013. This is an increase of 56%. Similarly, net income has grown steadily from S$38 million to S$85 million during the same period, translating to a rise of 124%.

What’s very commendable is that the firm has managed to increase its profits meticulously while using very little debt. During the time frame concerned, it only had an average total debt of S$19 million against an average cash hoard of S$120 million.

Furthermore, the company has been generating copious amounts of free cash flow from 2009 to 2013. On average, Raffles Medical Group managed to rake in S$54 million in free cash flow per year.

Free cash flow is essential in any business as it allows a company to reinvest the cash, make acquisitions, pay dividends, buy back shares, and/or pare down debt. Without any free cash flow, a company has to borrow money from banks, undertake private placements, or issue rights to its shareholders in order to obtain capital with which to sustain its business.

For the third quarter ended 30 September 2014, both revenue and net profit increased by 11.1% year-on-year for Raffles Medical Group. Turnover mainly grew due to “higher patient load, a larger network of clinics, and increased provisions of health insurance services” under its Healthcare Services segment.

Going forward, major growth for the firm can come in two ways: 1) Via expansion of its Raffles Hospital located in Bugis; and  2) through the development of a 5-storey commercial/medical building at Holland Village. Raffles Medical plans to utilise 9,000 of the 63,000 square feet of available space in the upcoming Holland Village building to provide medical services.

Currently, the healthcare company is trading at 25 times its historical earnings and has a dividend yield of 1.4%. Comparatively, the STI ETF (SGX: ES3), a proxy of the Straits Times Index, is going at a price-to-earnings ratio of 13.5.

If Raffles Medical’s growth falters, its valuation may be re-rated downwards quickly. That was what happened at OSIM International Ltd. (SGX: O23) when the company saw a dismal third quarter. OSIM fell 25% within a span of four days following the posting of its financial results. It was trading at close to 20 times its historical earnings then.

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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 Sudhan P doesn’t own shares in any companies mentioned.