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Why I’m Still Bullish About Raffles Medical Group Ltd

Raffles Medical Group Ltd (SGX: BSL) is one of the largest private healthcare groups in Singapore. Established in 1976, it now has a presence in 13 cities across Asia, serving more than 2.2 million patients.

On 9 April 2018, shares of Raffles Medical closed at S$1.15 apiece. From the most recent all-time high of S$1.675 seen on May 2016, the price of S$1.15 translates to a fall of more than 30%.

Short-term medical leave

Most of the slump can be attributed to the business’ slow growth in recent times.

In 2017, Raffles Medical’s revenue was S$477.6 million, up just a mere 0.8% from 2016. Net profit attributable to shareholders increased by a similar percentage to S$70.8 million. These are not fast rates of growth at all, especially when compared to the company’s record from prior years.

Another reason for the share price decline could be that the healthcare group was priced for growth over the past few years.

In 2016, 2015, and 2014, Raffles Medical had average price-to-earnings (PE) ratios of 36.9, 34.6, and 24.6, respectively. If a company with a high valuation multiple can’t produce growth, its share price usually gives way.

Time for recuperation?

However, I’m still bullish about Raffles Medical’s prospects for the long-term. And by long-term, I’m not thinking in terms of months, but in decades.

In its 2017 earnings update, Raffles Medical said that the new extension to its flagship Raffles Hospital in Singapore, the Raffles Specialist Centre, opened its doors to patients early this year. The company added:

“Various specialist centres and the radiology centre have been relocated to the new building from the existing hospital. With the new Raffles Specialist Centre in operation, works have begun on Raffles Hospital to open up new wards to increase bed capacity, as well as to refurbish the podium for new food and beverage and related shops.

Upon completion of these works by middle of the year, the two buildings Raffles Specialist Centre and Raffles Hospital will provide ambulatory and inpatient capacity to support the expansion of specialist services to serve the growing needs of our local and foreign patients.”

The capacity expansion should bode well for the long-term growth of Raffles Medical. An ageing population and the increasing affluence of people in Singapore should help to ensure a resilient business such as Raffles Medical does not become severely ill.

Another growth driver will be the company’s projects in China. Currently, Raffles Medical is developing a 400-bed international general hospital in Shanghai, and a 700-bed international tertiary general hospital in Chongqing.

In the 2017 earnings release, Raffles Medical gave updates on the progress of the two hospitals:

“Construction of Raffles Hospital Chongqing and procurement of equipment are progressing according to plans. Recruitment of International and Chinese physicians and hospital management staff have begun and response has been positive. Raffles Hospital Chongqing is planned to open in the fourth quarter of this year.

Raffles Hospital Shanghai, in Pudong Qiantan, is planned for opening in the second half of next year. Construction is also progressing according to plans.”

To give a scale of the potential for Raffles Medical in the two cities in China, in 2015, Singapore’s population was at 5.5 million whereas Chongqing’s and Shanghai’s populations were at 30.2 million and 24.2 million, respectively.

Dr Loo Choon Yong, the founder and current leader of Raffles Medical, has envisioned the company’s overseas revenue to make up more than 50% of total revenue, up from below 10% in 2015.

There are indeed execution risks in an entirely new environment for Raffles Medical, and the market may well be aware of that. Also, with muted growth for the company in Singapore currently, it doesn’t seem like market participants are bullish about Raffles Medical. However, the dark clouds on the company’s short-term picture actually bode well for the long-term investor.

What Warren Buffett once said comes to mind here:

“The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

The Foolish bottom line

One of the main competitive edges an investor can have is the “time-horizon advantage,” that was once described by John Huber, a portfolio manager at Saber Capital Management. He said that there is too much focus on the short-term and on trying to uncover information before the market. However, if one were to simply take a long-term view in the stock market, the investor will have an inherent edge.

Over the short run, Raffles Medical may be facing some headwinds. But in the long-term, I feel things are not as dreadful.

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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 in Raffles Medical Group Ltd.