Raffles Medical Group Ltd (SGX: BSL), or RMG, is an integrated healthcare services provider which provides comprehensive services from primary to tertiary healthcare. The group owns a hospital (Raffles Hospital) and also runs one of the largest networks of private family medicine and health screening centres in Singapore. In addition, RMG has just completed the construction of a new hospital in Chongqing, China, and is constructing a second hospital in Pudong, Shanghai, China.
The group recently conducted its very first share buyback since listing, and it’s interesting to note that this was done in spite of the group’s capital expenditure requirements for their China hospitals, as well as ongoing operating expenditure for daily operations. Could RMG be sending out a signal to investors?
Maiden share buyback
RMG conducted its maiden share buyback on 22 May, repurchasing a total of 50,000 shares at an average price of S$1.01 per share. Subsequently, the group made two more repurchases as highlighted in the table above, for a total of 200,000 shares repurchased at an average cost of S$1.01. Out of a maximum 179.8 million shares authorised for repurchased, this represents just a small portion at 0.11%.
Juggling cash flows
The share buybacks are interesting because the group has many upcoming investments in its China hospitals business, and has also opened its new Raffles Specialist Centre and launched its health insurance business at the same time. Thus, investors would automatically assume that the group needs to channel cash to bolster and finance these operations.
Cash is also required for the capital expenditure for its Shanghai hospital, which is still under construction and will only be ready by early 2020. In addition, the group also needs to pay out a final dividend of 2 Singapore cents per share which was declared and approved at its last Annual General Meeting.
On the surface, it, therefore, appears that RMG has to juggle many operational cash flow needs which have priority over share buybacks.
Healthy free cash flow generation history
RMG has had a history of generating very healthy free cash flows, as evidenced by the table above. However, due to the development of the new hospitals, the group has had to take up additional debt on its balance sheet to finance the construction. Core operations, however, continue to generate copious amounts of operating cash flow and this should be further enhanced once the new hospitals ramp up their operations and start contributing.
Share buybacks – benefits to investors
RMG can thus well afford to spend some cash to buy back its shares, as it has a long track record of healthy free cash flow generation. Buying back its shares for the first time ever also sends a strong signal to investors – that they are able to juggle their various cash flow needs and yet still buy back their shares to reduce their issued share count and enhance earnings per share (all things being equal).
It is also a way for the group to signal that it feels its shares offer good value at S$1.01, as Dr Loo Choon Yong is known to be prudent and conservative in running the business, and would not authorise a share buyback if he felt the shares were overvalued. Investors should take this as a positive cue that management is confident about the future prospects of the group.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of Raffles Medical Group. Motley Fool Singapore contributor Royston Yang owns shares in Raffles Medical Group.