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Raffles Medical Group Ltd is at a Multi-Year Low: Opportunity or Time to Flee?

In the previous article here, we looked at the reasons behind Raffles Medical Group Ltd’s (SGX: BSL) share price weakness.

In this article, we will explore if the falling share price is an opportunity for interested investors to get a bite of the company or if investors should flee and never look back.

Screening the healthcare firm for growth

I feel the fears driving the share price down are unwarranted. Yes, there may be short-term pains for Raffles Medical Group (RMG), but in the long-term, there is still growth.

In Singapore, Raffles Hospital at the Bugis area is expanding for growth. The extension, which is slated to open at the end of the year, it will allow Raffles Hospital to “further increase its breadth and depth of clinical services with projected concurrent expansion in outpatient specialist centres and inpatient facilities capacity”.

RMG’s collaboration with Singapore’s Ministry of Health (MOH) has also been extended for another five years from June this year. To know more about this partnership, let’s turn to a speech by Mr Gan Kim Yong, Minister for Health:

“Our collaboration with Raffles extends beyond primary care. Launched in June 2015, the Emergency Care Collaboration (ECC) is a partnership between the Ministry of Health and Raffles Medical Group, where Raffles Hospital receives patients brought in by the Singapore Civil Defence Force (SCDF) ambulances for emergency medical care and subsequent follow up care. These patients pay subsidised rates similar to what they would pay in the public hospitals. This has helped improve patients’ access to Accident & Emergency (A&E) services.

After one year, I am pleased to share that the collaboration has enabled more than 2400 patients to be treated in Raffles Hospital and patient feedback has also been positive.”

The partnership with MOH should also help to soak up the supply from Raffles Hospital’s extension.

In October last year, RMG opened a multi-disciplinary medical facility at Holland Village, Raffles Holland V. For the full year ended 31 December 2016, revenue from investment holdings improved 38% year-on-year to S$17.7 million. Part of the growth could be from Raffles Holland V.

Looking ahead, the management said that the mall would “contribute significantly to the Group’s results in the coming year”. Once successful, there’s an optionality for RMG to build more of such lifestyle malls in land-scarce Singapore as well.

In 2015, RMG entered into a joint venture with International SOS, which provides quality and comprehensive clinical care that operates ten clinics in China, Vietnam and Cambodia. The expanded footprint could help to fuel medical tourism for RMG due to referrals back to Singapore’s Raffles Hospital.

An ageing population, coupled with rising affluence in Singapore, should help to ensure a resilient business like RMG does not become severely sick.

Moving on, there’s the major expansions brewing in China.

In May 2015, RMG announced that it is forming a joint venture with Shanghai LuJiaZui Group to develop a 400-bed international general hospital in Shanghai’s Pudong New Area. The hospital is expected to open by the second half of 2019.

Furthermore, in April this year, RMG made public that it will be developing of a 700-bed international tertiary general hospital in the New North District of the Liangjiang New Area, Chongqing. The hospital is slated to begin operations by the second half of 2018.

In February 2013, RMG announced that it had signed a letter of intent with China Merchants Shekou Industrial Zone Co Ltd to collaborate a development of an integrated international hospital with more than 200 beds in Shekou, Shenzhen. However, so far, nothing concrete has emerged out of it.

To give a scale of the potentiality for RMG in Shanghai and Chongqing, in 2015, Singapore’s population was at 5.5 million as compared to Chongqing’s 30.2 million and Shanghai’s 24.2 million.

Once RMG gains experience of operating hospitals in China, it may be able to build more hospitals in other cities.

Founder of RMG, Dr Loo Choon Yong, has envisioned revenue from overseas to make up more than 50% of total revenue, up from below 10% in 2015.

Tying the loose ends together

At a current trailing price-to-earnings (PE) ratio of around 26 and a dividend yield of 1.9%, investors should also ponder if RMG’s valuation makes sense.

At 26 times its last 12-months earnings, an investor is buying into a capable management team, a well-known brand valued at US$124 million in 2016 by Brand Finance (a value that is not reflected on the company’s balance sheet) and future growth drivers. In fact, RMG is the only healthcare provider ranked as one of the most valuable brands in Singapore on the list.

Furthermore, the average PE ratio of the Singapore-listed healthcare stocks is around 36, some 10 points higher than RMG’s.

However, if the growth catalysts fail the test, RMG’s valuations could be impacted further.

Foolish bottomline

The father of value investing, Ben Graham, once said that in the short-term, the stock market behaves like a voting machine, but in the long-term, it acts like a weighing machine.

In the short-term, the market is punishing Raffles Medical Group. However, there’s a high chance that over the long-term, things are not as dire.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group Ltd. The Motley Fool Singapore contributor Sudhan P owns shares of Raffles Medical Group Ltd.