Healthcare services provider Raffles Medical Group Ltd (SGX: R01) has been a fantastic winner in the stock market over the past decade. Whereas Singapore’s market barometer the Straits Times Index (SGX: ^STI) has climbed by just 50% since June 2005, Raffles Medical’s up by some 897%.
But that is then and this is now. Can Raffles Medical go on to achieve new heights? Here are five reasons why I think it may.
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1. It’s simple
The post-World War II period was a time when technology blossomed.
The Americans put a man on the moon, we created sustainable energy by splitting atoms, and we’ve managed to put a television, a telephone, a calculator, a GPS system, and heck, even an entire computer into a device small enough to fit into a lady’s purse or the front pockets of a pair of jeans.
Yet, as my colleague Morgan Housel wrote back in 2012, “the single best stock to own from the 1950s to the early 2000s had nothing to do with computers, or technology in even the loosest sense.” It was the cigarette maker Altria.
One of the main reasons why Altria was such an outstanding winner, according to Morgan, is this:
“[S]imple products that rarely change often make better investments than those undergoing breakthroughs… [T]he odds that consumers will still be using the same toothpaste 20 years from now are good, as are the odds that Colgate will still own a sizable share of the market.
The biggest risk to any company over the long term isn’t that it won’t be able to grow earnings fast enough; it’s that it will go extinct. If you think in years instead of months, sustainability can be far more valuable than picking the next breakthrough.”
That’s a big advantage that Raffles Medical has. Medical technology is improving and changing all the time, but the service the company’s providing – healthcare – is basic and simple. So long as people will fall ill, doctors – and a company like Raffles Medical – will be needed.
2. It’s consistent
One key thing billionaire investor Warren Buffett looks for in his investments is a track record of consistent profitability. That’s one area in which Raffles Medical excels too.
The company’s flagship Raffles Hospital was officially opened back in March 2002 and since then, the firm’s revenue has grown in each consecutive year.
Source: S&P Capital IQ
Raffles Medical’s profit picture is a little messier. But, it’s worth pointing out that the firm has not only been consistently profitable, its earnings have shown a clear upward bias over time too.
3. It’s very profitable
Healthcare might seem to be an easy industry for a company to be in given that it’s considered to be defensive (the theory goes that recessions won’t hurt the demand for healthcare services). But, that’s not exactly true. Have a look at the table below:
Source: S&P Capital IQ
It compares important profitability metrics – the net profit margin and return on equity – between Raffles Medical and a bunch of its industry-peers which include Pacific Healthcare Holdings Ltd (SGX: P47), Singapore Medical Group Ltd (SGX: 5OT), Health Management International Ltd (SGX: 588), and IHH Healthcare Bhd (SGX: Q0F). I trust it’s easy to see that Raffles Medical’s a cut above the rest.
4. It’s financially strong
With the current talk around town being the possibility of rising interest rates, heavily-indebted companies might be sweating at their brow trying to figure out how they might navigate their businesses in an environment with expensive debt.
That’s something which does not bother Raffles Medical – the healthcare outfit has a balance sheet that’s in the pink of health with S$121 million in cash and just S$6.7 million in borrowings (as of 31 March 2015).
Source: S&P Capital IQ
At the moment, there are a number of growth opportunities that Raffles Medical’s pursuing which would require a huge slug of cash (more on these shortly). While the firm’s balance sheet may weaken temporarily as a result of having to spend now to grow tomorrow, its strong ability to generate cash from its business – you can see this in the chart just above – helps mitigate any potential risks.
5. It has many avenues for growth
Raffles Medical has three clear drivers for future growth. Beyond the development of a medical/retail centre in Holland Village and the expansion of Raffles Hospital, the company will also be building a new hospital in Shanghai, China.
These projects will cost a total of around S$600 million (S$120 million for the Holland Village project, S$310 million for Raffles Hospital’s expansion, and S$170 million for the new hospital in Shanghai) in capital expenditures. Based on Raffles Medical’s last reported financials, roughly S$230 million has already been paid for.
The projects will also give the company huge room for growth. For instance, Raffles Hospital’s expansion will see its gross floor area grow from 300,000 square feet to 520,000 feet. Meanwhile, the new hospital in China will be able to accommodate 400 beds; for context, Raffles Hospital has a current bed capacity of 380.
A Fool’s take
There are many things to like about Raffles Medical as a potential investment. But, there’s a wrench in the works – the healthcare outfit’s an expensive share. At its current price of S$4.41, Raffles Medical’s selling for 36 times its trailing earnings and that’s nearly three times the SPDR STI ETF’s (SGX: ES3) price-to-earnings (PE) ratio of 13.5 (the SPDR STI ETF is an exchange-traded fund tracking the fundamentals of the Straits Times Index).
Even the best companies can make for a lousy investment if bought at too high a price. Investors should carefully consider the valuation picture with Raffles Medical before any investing decision is made.
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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.