Raffles Medical Group Ltd’s Latest Earnings: Slower Growth in Earnings Seen – But That’s Okay

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) released its fiscal first-quarter earnings (for the three months ended 31 March 2015) this morning.

For a quick introduction, Raffles Medical runs its eponymous Raffles Hospital along North Bridge Road in Singapore in addition to 100 multi-disciplinary clinics scattered throughout the island. The company also has six medical centres in total in Hong Kong and Shanghai.

With that, let’s dig into the firm’s latest earnings release.

The numbers

Here’s a quick rundown of Raffles Medical’s financial figures:

  1. In the quarter, Raffles Medical’s revenue grew 8.5% year over year to S$95.0 million.
  2. Profit meanwhile, only managed to inch up by 2.9% to S$14.98 million compared to a year ago; consequently, Raffles Medical’s earnings per share (EPS) grew by only 0.8% to 2.62 cents.
  3. Operating cash flow for the quarter came in at S$16.15 million, up by 2.1% from the figure of S$15.8 million seen a year ago. With capital expenditures of S$3.47 million in the first quarter of 2015, Raffles Medical ended the quarter with free cash flow of S$12.67 million (operating cash flow minus capital expenditure).
  4. The healthcare outfit ended 31 March 2015 with a rock-solid balance sheet carrying S$120.9 million in cash and just S$6.7 million in debt; the selfsame figures seen a year ago were S$98.3 million (cash) and S$5.2 million (debt) respectively.

So, if we pull it all together, Raffles Medical managed to clock healthy top-line growth in the quarter, though its profit-growth had slowed down a little (more on that later). The firm also ended the quarter in the pink of health when it comes to its cashflow-producing ability and financial strength.

There were no dividends declared for the first quarter of 2015, like how it was in 2014.

Business highlights

Raffles Medical has two main business divisions, namely, Healthcare and Hospital Services. During the quarter, the company’s top-line growth had been driven by a 13.7% and 6.2% increase in revenue from the Healthcare and Hospital Services divisions, respectively.

While a slow-down in profit growth for Raffles Medical might not be a welcome sight, investors might want to note that this is partly due to higher staff costs incurred during the quarter, which in turn can be partly attributable to the “recruitment of more doctors, specialists, nurses and ancillary staff for new and expanded operations” at Raffles Hospital and new, upcoming medical centres.

In other words, the company had been spending more to fuel future growth, and this spending had led to a lower increase in profit for the quarter. For investors who have confidence in the firm’s growth prospects, this can actually be a good thing.

Future outlook

And speaking of growth prospects, one of the most important ones would be the extension of Raffles Hospital.

The company commented in the earnings release that works for the extension had already started last December and is on track to be completed in the first quarter of 2017. The extension, which will see an over 70% increase in Raffles Hospital’s floor area (the extension will add 220,000 square feet of space to the hospital’s current area of around 300,000 square feet), “will offer significant scope for Raffles Hospital’s expansion and growth over the next 10 years.”

The larger floor area aside, Raffles Medical’s management also commented in the earnings release that Raffles Hospital will “continue to grow with the expansion of the Cardiology, Surgery, Urology, ENT and Cancer clusters and the introduction of bone marrow transplant services.”

Another important growth-driver for the company would be the medical/retail complex that’s currently under construction in the Holland Village area of Singapore.

The centre, which is slated for completion in the first quarter of 2016, will have 65,000 square feet of area, of which 9,000 have been catered for the provision of medical and specialist services to local and expatriate patients. The remaining space will be leased to DBS and other tenants that offer retail, lifestyle, and food & beverage services.

Raffles Medical’s clinic network and dental services are also expected to benefit from the government of Singapore’s new healthcare initiatives; most of the company’s clinics are included under the government’s various healthcare programs.

In the earnings release, management warned of a “dampening effect on healthcare demand” in the region which may be brought about due to the “more measured pace of economic growth.” But, Raffles Medical’s confident that its expansion plans – namely the extension of Raffles Hospital and the Holland Village project – has positioned it well to meet the future.

As for a nearer-term outlook, management commented that “the Directors expect [Raffles Medical] to continue to grow for the rest of the year.”

At its current share price of S$3.99, Raffles Medical’s valued at 33 times its trailing earnings.

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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.