Raffles Medical Group Ltd (SGX: BSL), a one-time stock market darling, has been facing numerous challenges in recent years. A saturated private healthcare market in Singapore and strong competition from regional players for medical tourists have led to stagnating growth for the company. Consequently, market participants have driven the Raffles Medical share price down by nearly 40% from its all-time high that was reached in July 2015.
Analysts from DBS Group Holdings Ltd’s (SGX: D05) research arm have even downgraded Raffles Medical Group and have set a near-term target price of S$1.00, which is just below its current stock price of S$1.01. Investors who are holding on to Raffles Medical shares are likely feeling the pressure to sell.
However, as a shareholder of Raffles Medical, I believe the company’s current valuation is very reasonable when considering its long-term growth prospects. I certainly have no intention to sell my holdings just yet. Here’s a simple valuation analysis to build my case.
As mentioned above, at the time of writing, Raffles Medical share price is at S$1.01 apiece. This translates to a price-to-earnings (PE) ratio of 25. On first glance, this may seem like a lofty valuation to pay for a company that has struggled to grow its bottom line in recent years. However, investors should also pay attention to the company’s long-term growth prospects to determine whether the PE multiple makes sense.
There are a few growth drivers that can boost the company’s bottom line in the near future. Firstly, Raffles Medical Group opened its Specialist Center in January this year. The 20-storey building will add additional bed capacity to the company’s adjacent Raffles Hospital and increase its specialist services. Even before the centre’s opening, Raffles Hospital was contributing more than half of the company’s revenue, and also had a much higher profit margin than the company’s healthcare services segment, which consists of its medical and dental clinic network.
As such I believe that Raffles Medical Group will likely experience a significant boost in profitability through the opening of the Specialist Centre. The effects of this have already been felt with a 4.2% increase in revenue from the hospital services segment in the first quarter of 2018.
Secondly, the planned opening of Raffles Hospital Chongqing and Raffles Hospital Shanghai are on track. The hospital in Chongqing is designed with 700-beds and is expected to open this year. Meanwhile, the hospital in Shanghai has a capacity of 400 beds, and is slated to be opened next year.
Raffles Hospital already contributes more than 50% to Raffles Medical Group’s revenue, as mentioned above, and it has a capacity of 380 beds. The China hospitals have a total bed capacity of more than three times that of Raffles Hospital. It is therefore, easy to see that the opening of the two hospitals in China, and the Specialist Center in Singapore, can add significantly to Raffles Medical Group’s bottom line.
Furthermore, the company has maintained a clean balance sheet (S$94.0 million in cash and S$71.7 million in debt as of 31 March 2018) even as it develops its growth projects. The clean balance sheet gives Raffles Medical Group the financial muscle to see out any teething issues when its new hospitals open. If I account for this significant profit boost, I estimate that Raffles Medical Group’s current share price is well below 20 times its future earnings.
The Foolish bottom line
Based on a very conservative earnings projection, I do believe that it is certainly not time to give up on Raffles Medical Group just yet. Not only has the company sowed the seeds for future growth, it also has a reasonable valuation if you include the immense upside potential in the future. The company’s venture into China may lead to near term losses, but in the long run, I am confident that the company will bounce back even stronger and committed long-term shareholders will most likely reap the rewards.
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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. The Motley Fool Singapore contributor Jeremy Chia own shares in Raffles Medical Group.