For Investors: A Quick Overview Of The Cost Structure Of Health Management International Ltd

Health Management International Ltd (SGX: 588) is a healthcare services provider with a presence in Singapore, Malaysia, and Indonesia.

It owns and operates two hospitals in Malaysia (the Mahkota Medical Centre in Malacca and Regency Specialist Hospital in Iskandar Malaysia) with a total bed capacity of more than 500.

The company also has a healthcare training centre in Singapore, the HMI Institute of Health Sciences. It provides Skills Future Singapore accredited training courses for the healthcare support sector.

Over the past five years, Health Management International’s stock price has climbed by a massive 500% or so. This led me to take a closer look at the company’s business.

In a previous article, I studied the company’s sources of revenue. I thought it’d be interesting to follow up with a take on its cost structure.

Here’s a chart showing a breakdown of Health Management International’s total operating expenses of RM 335.9 million for its fiscal year ended 30 June 2016 (FY2016):

Health Management International cost structure
Source: Health Management International FY2016 annual report

There are a few observations we can draw:

1. Staff costs is the largest expense category, representing about 58% of Health Management International’s total operating costs.

2. Other than medical material cost (which represents about 21% of FY2016’s total operating costs), the majority of the company’s costs – such as staff costs, rental, and depreciation – are fixed in nature.

Although there is no detailed breakdown of the company’s costs into fixed and variable components, we can make an educated guess that fixed costs represent north of 70% of Health Management International’s total operating expenses.

As fixed costs are essentially a committed cost, which will change little with an increase or decrease with the amount of medical services rendered, we can expect Health Management International’s profitability to grow at a higher rate than revenue as the company’s patient number grows. This, of cause, assumes that there is no increase in fixed costs caused by other factors such as inflation.

By understanding Health Management International’s cost structure, investors can gain a clearer perspective on the company’s future profitability.

This will allow investors to form a better opinion on the attractiveness of the company as a long term investment.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.