Raffles Medical Group Ltd (SGX: BSL) was once a stock market darling.
From 2005 to 2015, the company was in its high-growth phase, expanding its network of clinics and hospital services. Raffles Medical Group’s revenue and profit grew alongside its expansion and expectations were high.
However, in the past couple of years, the company’s growth has come to a halt, hurting the share price as a result.
The big slowdown
Stagnant revenue has led to suggestions that its core Singapore market has reached saturation. To compound the situation, the company also acquired a network of clinics overseas that has been loss-making, squeezing the company’s margins and profits.
Not surprisingly, investors have “punished” Raffles Medical’s stock for its lack of growth. From its 2015 peak, its share price has since fallen around 30%.
However, I still expect Raffles Medial’s performance to improve over the long-term. I am confident that under the leadership of founder and chief executive officer, Dr Loo Choon Yong, Raffles Medical can turn a corner and return to growth in the future.
In fact, if the stock were to decline further, I would consider adding more shares of the company.
Massive market opportunity in China
There’s a limit to how big Singapore’s private healthcare market will be.
In response, Raffles Medical had taken the initiative to expand its operations overseas. Currently, the company owns clinics in China, Vietnam, and Japan. And that is just the tip of the iceberg. The group is in the process of constructing and opening two new hospitals: one in Chongqing and one in Shanghai.
China has one of the fastest growing middle-class populations in the world. As such, demand for private health-care has been rising fast. According to Dr Loo’s estimates, there are around 140 million people in China who can afford Raffles Medical’s standard of care.
Dr Loo has also assured investors and potential clients that standards in the Chinese hospital will be nothing short of the level seen in Singapore. Local and international doctors were recruited and will undergo training in Singapore.
Besides the two hospitals in development, Dr Loo has pointed out that Beijing and Shenzhen are keen on having similar hospitals.
While the growth looks promising, international expansion might not always go smoothly. Raffles Medical needs to cater to cultural differences and overcome political challenges. However, I am confident that the hospitals in China will do well despite the risks. Raffles Medical has a track record of success and a trusted brand under the leadership of Dr Loo.
Healthy cash flows and stable core business
Raffles Medical’s core business has been resilient over the years. The group’s annual operating cash flow has been consistently above S$70 million in each of the last five years, suggesting that its core Singapore business is stable.
Despite limited growth opportunities, Singapore will continue to provide the company with healthy earnings and cash flow to expand its business and pay dividends to shareholders. The group also has investments in property, which provides rental income.
The core Singapore operations will play an important supporting role in the initial start-up phase of its two new hospitals in China.
The Foolish bottom line
Despite the limited revenue growth in recent years, I believe that Raffles Medical can return to growth when its two new hospitals commence operations. Profitability from its Chinese hospital might take a few years, but if the group’s track record is anything to go by, I expect profits to flow in eventually.
China provides a massive market opportunity. If the first two hospitals in China prove to be successful, there could be more hospitals in the longer run.
Raffles Medical’s shares currently have a price-to-earnings multiple of 28. Its valuation is certainly not cheap in comparison with the broader stock market. However, with its long-term track record, huge market opportunity for growth, and operations in a defensive industry, I am willing to pay up for its stock.
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he 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. Motley Fool Singapore contributor Jeremy Chia owns shares in Raffles Medical Group Ltd.