I have previously explored some of the reasons Raffles Medical Group Ltd (SGX: BSL) is currently on my stock watchlist. For those new to the company, Raffles Medical runs hospital and healthcare services in Singapore. It also has a network of clinics in five countries and 13 cities as well as two hospitals (one under development) in China.
Sharp-eyed investors might ask why I’m putting the company on my watchlist, but not my “buy” list.
It’s time to address why I haven’t invested in Raffles Medical despite all of its positives.
It’s not cheap enough
As investors, the goal is usually to buy something at less than its value. This philosophy applies not only to value stocks, but also growth stocks like Raffles Medical. In simple terms, that means paying less than S$1 for each dollar of asset.
One way to gauge Raffles Medical’s valuation (overvalued, fair, or undervalued) is to compare its price-to-earnings ratio (P/E) and price-to-book ratio (P/B) to those of the market. I will be using the SPDR STI ETF (SGX: ES3) as a proxy for the market.
At S$1.08, Raffles Medical is trading at a P/E of 27.0 times. This is significantly higher than the SPDR STI ETF’s P/E ratio of 12.7. Similarly, its P/B ratio of 2.4 times is more than twice that of the SPDR STI EFT’s P/B ratio of 1.1 times.
Generally, it’s very difficult to find growth companies trading at P/E and P/B ratios that are below the market. Still, we want to make sure the price we pay is fair to give us a reasonable return in the long term.
Investors must decide whether paying such a premium to the market average for Raffles Medical is reasonable. Personally, I find the price a little too steep.
Despite all the good attributes of Raffles Medical as an investment, its valuation is too steep (at least for me), so I’m staying on the sidelines for now.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore recommends Raffles Medical Group Ltd.