Assessing Raffles Medical Group Ltd Using Warren Buffett’s Acquisition Criteria

Raffles Medical Group Ltd (SGX: BSL), or RMG for short, is one of the largest private healthcare groups in Singapore. Co-founded in 1976 by Dr Loo Choon Yong and Dr Alfred Loh, RMG now has a presence in 13 cities across Asia, serving more than 2.2 million patients.

Year-to-date, the healthcare outfit’s share price has fallen more than 20% as opposed to the Straits Times Index’s (SGX: ^STI) rise of around 11% during the same period.

For investors who want to know if the firm is possibly a bargain stock right now, we can turn our attention to a six-point acquisition criteria formulated by Warren Buffett. Potential investors can also use the criteria as a starting point to research on the company.

1. Pre-tax earnings of at least US$75 million

For the full year ended 31 December 2016 (FY2016), RMG had pre-tax earnings of S$82.9 million, which translates to around US$62 million. Although the figure is lower than US$75 million spelt out by Buffett, retail investors looking into Singapore-listed companies should not be too strict about this rule as this might inadvertently sieve out many quality companies.

2. Demonstrated consistent earning power

Source: Raffles Medical Group Ltd’s Annual Reports

RMG’s earnings have increased consistently from FY2012 to FY2016, with the exception in FY2013. In that year, the firm saw a one-off gain of S$20.4 million after the disposal of its wholly-owned subsidiary, Raffles Medical Management Pte Ltd. Excluding the one-time gain, net profit would have been S$64.5 million.

3. Good returns on equity (ROE) while employing little or no debt

Source: Raffles Medical Group Ltd’s Annual Reports

The ROE figure has been declining over the years, from 14.6% in FY2012 to 10.5% in FY2016. This is something investors should keep a close eye on. Without the one-off gain in FY2013, ROE would have been lower at 13.7%.

In FY2016, the firm had a total debt of around S$30 million but with a cash balance of close to S$112 million. Therefore, the debt is extremely manageable.

4. Management in place

The co-founder of RMG, Dr Loo, is currently the Executive Chairman. As of 31 December 2016, he had a total interest of 51.3% in RMG.

Dr Loo, together with his management team, has grown RMG from a fledgeling operation to one that had S$473.6 million of revenue in FY2016.

5. Simple business

Healthcare is a simple business to understand. Whenever someone falls sick, regardless of the economic condition, he or she has to visit a doctor to get treated.

6. An offering price

RMG is going at S$1.095 per share, as of the time of writing. This translates to a trailing price-to-earnings ratio of around 27.

Now that potential investors have a quick overview of the healthcare provider, they can dive deeper into other aspects of the business such as its cash flow generating ability, future growth prospects, and so on.

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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.