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Raffles Medical Group Shares Are Down Over 35% From Its Peak. Can The Company Regain its Spark?

Investors in Raffles Medical Group Ltd (SGX: BSL) shares have probably been feeling disappointed by its performance in recent years. The one-time high flying stock has failed to deliver meaningful bottom line growth for more than four years, leaving the stock languishing over 35% off its peak.

Can this former stock market darling, finally regain its spark? Let’s take a closer look at its current challenges, and its growth opportunities.

The Headwinds

Raffles Medical Group continues to face challenges in its healthcare services sector.

In 2017, revenue from this business segment, which contributed 40% of its revenue, declined 1.6%. The  saturated local family medicine sector in Singapore may be behind the slowdown in demand. Despite improvements in the second quarter of 2018, which was boosted by a new health screening services contract, the longer-term trend persists.

In addition, rising staff costs have hampered the company’s bottom line. Staff costs increased 2.4% in 2017, which was faster than its revenue growth of just 0.8%. The extra expenses were a drag on profit growth.

Raffles Medical Group’s hospital division has also floundered in its latest quarter. Revenue from this segment declined 2.3% because of lower demand from medical tourism. While Singapore is still the region’s top medical tourism destination, its neighbours have been closing the gap, offering lower costs, and better quality of care.

The group is also in the midst of building two new hospitals in China, one in Chongqing and the other in Shanghai. The initial years of any new project is going to be challenging, and Raffles Medical Group will likely face teething losses in the near term, which could eat into the group’s profit in the near term.

The Upsides

Despite the near-term teething issues, the biggest driver of growth for Raffles Medical Group is still the two upcoming China hospitals. In 2017, the group’s maiden hospital in Singapore contributed S$62.5 million or a whopping 73% of the group’s overall profits. It is still too early to predict if the two China hospitals will be able to garner the same level of sales and profitability, but the initial signs look good for the two new hospitals.

With China’s rapidly aging population and rising affluence, the private healthcare market in China is expected to see robust growth up to 2030. Together with the Chinese government’s efforts to ensure that all citizens have access to basic healthcare services, the China market represents a great opportunity for international players like Raffles Medical Group.

In addition, Raffles Medical Group has recently opened its 20-storey specialist centre as an extension to its flagship Raffles Hospital Singapore. The group was in the midst of refurbishment works for its outpatient and inpatient wards in the second-quarter of 2018, and is scheduled to open these facilities in the current quarter. A higher utilisation rate of its hospital space, and expanded inpatient capacity could provide a boost to its hospital services segment revenue.

The Foolish Take Away

Every company is bound to face hiccups in its business life.

Raffles Medical Group is no exception. The last four years have been some of the most tumultuous in its 32 year history. Lower medical tourism demand, higher staff costs, and a saturated general health services sector in Singapore have all been part of the reasons why the company has struggled to deliver the kind of growth that investors have been accustomed to.

However, the company seems to be moving in the right direction by extending its hospital services into the fast-growing China market. There is bound to be challenges ahead, but I believe that the seeds of growth have been planted. When the dust settles, investors who are in it for the long haul are likely to reap the returns.

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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 Jeremy Chia owns shares in Raffles Medical Group Ltd.