Should You Invest In Raffles Medical Group Ltd Now?

One of the best performing stocks in Singapore’s market since 2005 is Raffles Medical Group Ltd (SGX: R01). Shares of the private hospital and clinic operator have generated a return of more than 1,100% to shareholders with dividends reinvested since 1 January 2005.

That is an annual return of 25.5% over the past 11 years. It seems like the company has been improving the lives of both its patients and shareholders through the years.

But that is then and this is now. Can the company’s shares continue delivering those stupendous returns of the past?

To answer the question, we might need to break down the factors that have resulted in Raffles Medical’s huge returns.

Business growth is one clear factor. From 2005 to 2014, the company’s revenue more than tripled from S$113.8 million to S$374.6 million, representing a respectable growth rate of 14% per annum. Meanwhile, net income did even better, growing by 21% annually over the same period.

But, due to some increase in Raffles Medical’s total share count over the years, its earnings per share only climbed by around 17% per year from 2005 to 2014. Don’t get me wrong – 17% is a great growth rate, but it is still shy of the aforementioned 25.5% annual gain that investors had enjoyed with Raffles Medical’s shares.

This brings me to the other important factor: An expansion in Raffles Medical’s valuation. In 2015, Raffles Medical had an average price-to-earnings (PE) ratio of 19.6. Interestingly, Raffles Medical trades at 33.6 times trailing earnings at the moment. In other words, the company has experienced a 71% expansion in its valuation since 2005 – that has helped contribute to the additional gains that shareholders have enjoyed throughout the years.

With the information we have now, let’s circle back to the question I posed earlier: Can the company’s shares continue delivering those stupendous returns of the past?

If you think that Raffles Medical’s business can continue growing at a high rate for the next decade and also enjoy a further expansion in its earnings multiple, then your conclusion may be that the company can deliver some solid returns over the next 10 years.

However, if you are expecting growth in the company to slow in the coming years and view the current PE of 33.6 as excessive, then your answer is likely to be very different: Raffles Medical may not deliver any outsized returns in the future at all.

What is the more likely scenario for Raffles Medical in the next decade? Will its business continue growing strongly, or will growth slow markedly? Let me know your views below!

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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 Stanley Lim does not own any companies mentioned above.