The key to successful long-term investing is to pick great companies and hold them for years (decades if possible), allowing your investments to compound over time. This is the exact strategy that has made investing legend Warren Buffett the third richest man in the world today.
However, applying this strategy is easier said than done. To get it right, investors need to first pick the right stocks that have the potential to compound faster than the broader market. That said, I have dug deep into Singapore’s stock market to find two companies that I believe fit the bill: DBS Group Holdings Ltd (SGX: D05) and Raffles Medical Group Ltd (SGX: BSL).
Anchoring your portfolio
It is no secret that Warren Buffett is a big fan of bank stocks, with five of his 10 largest holdings in his investment conglomerate Berkshire Hathaway having a banking component. Similarly, investors in Singapore can gain exposure to bank stocks by buying one of the three major locally-listed banks.
In my opinion, the pick of the bunch is DBS Group Holdings Ltd.
Although all three banks have shown remarkable consistency over the years, DBS’s position as the largest and most recognised bank makes it my top bank pick. DBS is also at the forefront of digitalisation and was named the World’s Best Digital Bank by Euromoney for the second time in three years in 2018.
Over the past 10 years, the bank has had an impressive track record of growth. Its total income (a bank’s revenue) more than doubled from S$5.34 billion in 2006 to S$13.1 billion in 2018. Over the same time frame, earnings per share increased from S$1.28 to S$2.01. The fact that this period included the financial crisis of 2008-2009 makes DBS’s track record all the more impressive.
DBS has also managed to increase its share of the loan market in Singapore over the past 10 years. Its overall loan market share in Singapore increased from 21% in 2009 to 25% in 2018. This demonstrates DBS’s growing brand value. In 2018, DBS achieved a decade-high return on equity of 12% driven through higher net interest margins and growing its fee-based business.
DBS looks set to continue to grow over the next 10 years at least as it continues to dominate the Singapore market. At its current share price of S$26.99, DBS has an inexpensive price-to-book ratio of 1.40 and a trailing price-to-earnings ratio of 12.5.
Expanding into China’s private healthcare
Raffles Medical Group was once Singapore’s stock-market darling. The private healthcare company, which operates a network of family medicine clinics and a hospital in Singapore, was growing at a rapid pace. But in the past five years, the group has faltered as revenue and profit growth was unremarkable.
However, all of that looks likely to change over the next 10 years. Raffles Medical opened its first tertiary hospital (Raffles Hospital Chongqing) in China on 2 January 2019. The hospital is the first of two tertiary hospitals (the second being Raffles Hospital Shanghai) it’s opening in China this year.
While the Group expects numerous bumps along the road and a few years of start-up losses, it is confident that the two hospitals can eventually be a boost to profits in the long term. Raffles already operates a network of family medicine clinics in China that could provide Raffles Hospital Chongqing and Raffles Hospital Shanghai with a ready stream of referrals.
The company’s maiden hospital in Singapore has been a huge success, contributing S$57.1 million, or 63%, of the Group’s total profit in 2018. If the two hospitals in China achieve just a fraction of the success of Raffles Hospital Singapore, it could be a significant lift to earnings per share and also open up more opportunities for expansion in the future.
Furthermore, Raffles Medical Group’s existing business is generating plenty of cash to see it through its two China hospitals’ initial teething phases. In 2018, the group generated S$91.5 million from operating activities.
While the past five years have been challenging for the group, the future could sing a different tune. Investors who are willing to take the long view might well be rewarded down the road. At the time of writing, Raffles Medical shares change hands at S$1.09. This translates to a price-to-earnings ratio of 26.9, a price-to-book value of 2.4, and a dividend yield of 2.29%.
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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 recommends DBS Group Holdings Ltd and Raffles Medical Group Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares of DBS Group Holdings Ltd and Raffles Medical Group Ltd.