Some companies in Singapore’s stock market that provide healthcare services have been very resilient stocks of late. Two such firms are Raffles Medical Group Ltd (SGX: R01) and Singapore O&G Ltd (SGX: 41X). To the point, Raffles Medical’s stock price has gained 17% over the last 12 months even as the local stock market barometer, the Straits Times Index (SGX: ^STI), has declined by 15%. In the case of Singapore O&G, since the close of its first trading day as a public-listed company on 4 June 2015, its shares are up by 20% while the index is down by 14%. Individual…
Some companies in Singapore’s stock market that provide healthcare services have been very resilient stocks of late. Two such firms are Raffles Medical Group Ltd (SGX: R01) and Singapore O&G Ltd (SGX: 41X).
To the point, Raffles Medical’s stock price has gained 17% over the last 12 months even as the local stock market barometer, the Straits Times Index (SGX: ^STI), has declined by 15%. In the case of Singapore O&G, since the close of its first trading day as a public-listed company on 4 June 2015, its shares are up by 20% while the index is down by 14%.
Individual investors, looking at the aforementioned nice gains that Raffles Medical and Singapore O&G have delivered fairly recently, may wonder: Which of the two healthcare providers may be the stronger investment at the moment?
There are many other important areas for investors to look at in order to arrive at an answer to the question, but in here, let’s focus on three key aspects of the two healthcare providers’ business fundamentals: The strength of their balance sheet, their track record of growth, and their valuation.
Strength of the balance sheet
A weak balance sheet – one that’s heavily saddled with lots of debt – can be a risky thing for investors. When a company with a shaky balance sheet has trouble servicing or repaying its borrowings, its shareholders may be subject to painful outcomes such as dilution, the elimination of dividends, involuntary sales of assets, and in the worst-case situation, bankruptcy.
There appears to be a tie here between Raffles Medical and Singapore O&G as they both have strong balance sheets. As of 31 December 2015, Raffles Medical had S$86 million in cash and equivalents and just S$32 million in total debt whereas Singapore O&G held S$24.2 million in cash and equivalents and zero borrowings.
Track record of growth
A company that can’t grow its business over time will find it tough to build value for its shareholders. That’s why an observation of a company’s historical growth rates can be important – while a company’s history is far from being a perfect indicator of its future, it can still give us some guidelines on what we can expect from the firm in the years ahead.
The metrics I’m interested in are Raffles Medical’s and Singapore O&G’s revenues, profits, and operating cash flows.
As Singapore O&G is a fairly new company in the stock market, financial records for the company only stretch back to 2012. That short track record does paint a nice picture though.
According to data from S&P Global Market Intelligence, in 2012, Singapore O&G had clocked S$8.1 million in revenue, S$3.0 million in profit, and S$2.1 million in operating cash flow. These figures have all displayed strong growth as revenue had more than doubled to S$16.6 million in 2015, profit had jumped by 78% to S$5.3 million, and operating cash flow had tripled to S$6.4 million.
In the case of Raffles Medical, here’s the company’s track record for the same period as shown for Singapore O&G just above:
- Revenue: Up by 32% from S$312 million in 2012 to S$410.5 million in 2015
- Profit: A 22% increase from S$56.8 million in 2012 to S$69.3 million in 2015
- Operating cash flow: S$72.8 million in 2015, a small 4.7% bump from the S$69.5 million in 2012
So as you can tell, while Raffles Medical had also showed solid growth, the numbers were far less impressive than those of Singapore O&G. That said, it should be noted that Singapore O&G is a far smaller company than Raffles Medical and that it’s generally easier for a company to grow with a small base as a starting point.
Even the best businesses can become a lousy investment if they are bought at too high a price. This is why valuations are important.
Raffles Medical and Singapore O&G have profit and free cash flow that have historically not fluctuated wildly. Because of that, simple ratios such as the price-to-earnings (PE) and price-to-free cash flow (PFCF) can be useful valuation measures. Here’s how Raffles Medical and Singapore O&G stack up:
- Raffles Medical: Current share price of S$4.53, PE of 37.3, and PFCF of 67.7
- Singapore O&G: Current share price of S$0.77, PE of 31.4, and PFCF of 27.6
Singapore O&G has emerged as the winner once again given its lower PE and PFCF ratios.
A Fool’s take
In sum, both healthcare providers have great balance sheets but Singapore O&G is the stock with the better history of growth and the cheaper valuation.
As a reminder, while what we’ve seen above is useful and important, they shouldn’t be taken as the final word on the investing merits of both Raffles Medical and Singapore O&G. Further research on other areas of the companies’ businesses – such as their future growth prospects – is needed before any investing decision can be reached.
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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.