Raffles Medical Group Ltd’s Latest Earnings: Is Everything Okay with Just 2% Profit Growth?

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) had released its fiscal second-quarter earnings (for the three months ended 30 June 2015) earlier this morning.

As a brief introduction for some context later, Raffles Medical owns and operates Raffles Hospital along North Bridge Road in Singapore. The company also runs a large network of multi-disciplinary medical centres in Singapore in addition to a smaller handful of clinics and medical centres in Hong Kong and Shanghai.

With that, let’s move onto the firm’s latest set of financial figures.

The numbers

Here’s a quick take on Raffles Medical’s headline numbers:

  1. For the reporting quarter, Raffles Medical’s revenue grew by 7.2% year over year to S$99.25 million.
  2. But, profit only managed to creep up by 2.2% to S$15.95 million from S$15.61 million a year ago. As a result of a slightly higher share count (due primarily to share option schemes for employee remuneration and the issue of shares in place of cash for dividends), Raffles Medical’s earnings per share (EPS) for the reporting quarter had remained unchanged from the 2.81 Singapore cents seen in the second-quarter of 2014.
  3. Raffles Medical produced S$23.36 million in operating cash flow for the reporting quarter and with capital expenditures clocking in at S$22.78 million, the healthcare outfit had thus generated free cash flow of only S$576,000. This compares unfavourably with a year ago when Raffles Medical had operating cash flow, capital expenditures, and free cash flow of S$38.62 million, S$4.94 million, and S$33.68 million, respectively.
  4. The company ended the reporting quarter with a rock-solid balance sheet with S$119.53 million in cash and just S$7.07 million in debt. That said, Raffles Medical’s balance sheet had weakened compared to a year ago when the selfsame figures were S$130.61 million and S$5.20 million respectively.

If we pull everything together, we see that Raffles Medical has managed to achieve some healthy top-line growth, though its earnings and cash flow situation were a little disappointing (more on these later). The firm’s balance sheet also remained strong in the reporting quarter.

Raffles Medical had declared an interim dividend of 1.5 Singapore cents per share for the reporting quarter, unchanged from a year ago.

Business highlights

The healthcare outfit’s 7.2% total revenue growth had come on the back of a 5.7% and 6.6% increase in revenue for its Healthcare Services and Hospital Services segments, respectively.

Raffles Medical’s profit margin had suffered primarily due to increased staff costs, which grew by 9.4% to S$48.46 million. This spending though, can be seen as for a good cause – Raffles Medical had been busy recruiting more doctors, specialists, nurses, and ancillary staff that’s needed for the Raffles Hospital expansion (more on this shortly) and new medical centres at Shaw Centre in Orchard Road which started serving its first patients just last month.

In other words, Raffles Medical had spent more today to power growth for tomorrow; this makes the meagre profit growth okay for now, though investors would need to watch for signs of much better profit in the future.

Meanwhile, Raffles Medical had also ramped up its capital expenditures during the reporting quarter as compared to a year ago; these spending were also likely made to build the foundation for future growth opportunities.

The outlook ahead

There are currently three big drivers for Raffles Medical’s future growth, so let’s touch on them.

First, there’s the ongoing development of a new wing for Raffles Hospital. Works there started in December 2014 and when completed in the first half of 2017, it will “offer significant scope for Raffles Hospital’s expansion and growth over the next 10 years.” The extension will see Raffles Hospital’s gross floor area grow from around 300,000 square feet currently to around 520,000 square feet.

Second, there’s the construction of a medical/retail centre in Holland Village. The development is “on track to be completed in the first quarter of 2016” and will have roughly 65,000 square feet of gross floor area of which 9,000 “will be dedicated to the expansion of [Raffles Medical’s] medical and specialist services to cater to both local and expatriate patients.” The remaining leasable area will go to DBS Bank, an anchor tenant for the centre, and other retail services.

Third, Raffles Medical had announced this May that it has entered into a joint-venture with established China-based developer Shanghai LuJiaZui Group to develop a 400-bed international hospital in Shanghai’s Pudong New Area. For perspective, Raffles Hospital only has a capacity for 380 beds. Raffles Medical is currently hard at work finalizing the plans for the new hospital for submission.

Beyond the big-three, the healthcare outfit’s aforementioned new medical centres in Shaw Centre, which cover 17,500 square feet, can also “provide for the total healthcare needs of [Raffles Medical’s] patients at a new convenient location.”

On a drearier note, Raffles Medical’s management warned in the latest earnings release that the “more measured pace of economic growth in Singapore and the region may have a dampening effect on healthcare demand.” But, with Raffles Medical’s growth opportunities – in particular the Holland Village development and Raffles Hospital’s extension – management believes that the firm “is well positioned for the future.”

Investors might be pleased to know that Raffles Medical’s Directors “expect the Group to continue to grow for the rest of the year” based on the current economic outlook and barring unforeseen circumstances.

Raffles Medical opened at S$4.95 today. At that price, the firm’s trading at 41 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 Group.