The Motley Fool

Better Buy: Raffles Medical Group Ltd vs. IHH Healthcare Bhd

Raffles Medical Group Ltd (SGX: BSL) and IHH Healthcare Bhd (SGX: Q0F) are two of the largest healthcare companies listed in Singapore. Both companies operate hospitals and medical centres around the region. 

In the last five years, IHH Healthcare’s stock has declined 3.6%, while Raffles Medical’s shares have plunged 26.5%. While the pair of healthcare companies have not fared so well in the past, the future may sing a different tune, with both companies making big strides by opening new hospitals in China.

With that said, here’s a quick comparison to find out which of the two companies makes a better investment today.

Introducing the contenders

On the surface, Raffles Medical Group Ltd and IHH Healthcare Bhd have fairly similar businesses. But there are actually important differences to appreciate.

Raffles Medical Group owns a network of medical clinics and a hospital in Singapore. It also has an investment property in Holland Village that contributes rental income. The group recently expanded overseas by acquiring a network of clinics in China and also opened a joint venture hospital in Chongqing, China. A second hospital in China is expected to be opened later this year.

IHH Healthcare Bhd is a much larger company than Raffles Medical. It operates 84 hospitals around the world, including well-known brands such as Gleneagles and Parkway in Singapore. It also has a 35.69% stake in Parkway Life REIT.

The group is opening a Gleneagles in Chengdu and Shanghai over the next few quarters and acquired a 31.17% stake in Fortis Healthcare last year, expanding its footprint in India.

Growth prospects

Both Raffles and IHH have decent growth prospects.

Raffles Medical Group opened its first hospital in China late last year and will be opening a second hospital there later this year. While these two new hospitals are expected to incur gestational losses at the start, they will hopefully eventually become profitable and start being accretive to earnings.

IHH Healthcare has also laid the foundations for future growth. The group’s Gleneagles Hong Kong hospital was set up in 2017 and is still undergoing stabilisation. And as mentioned earlier, IHH is also opening two new hospitals in Chengdu and Shanghai, which are expected to be open in the fourth quarter of 2019 and the second half of 2020 respectively. On top of that, 2019 is the first year that the newly-acquired stake in Fortis will contribute to its bottom line. 

However, because of IHH’s relatively larger size, it will take much more to move the needle for the company. As such, I believe Raffles’ two new hospitals in China will make a bigger impact on its bottom line than what IHH has in its pipeline.

Winner: Raffles Medical Group

Financial strength

Beyond their runway for growth, another important aspect to compare is the pair’s financial muscle and cash reserves. A larger cash reserve means that a company will not need to dip into debt markets that can increase its financing costs. 

Raffles Medical does considerably better in this respect. It has a net-debt-to-equity ratio of just 0.03 times.

On the other hand, IHH Healthcare has a net-debt-to-equity ratio of 0.15 times. 

Winner: Raffles Medical Group

Valuation

Lastly, from a valuation standpoint, Raffles Medical seems to come out on top again. Based on 2019 first-half results, Raffles Medical has a price-to-annualised earnings of around 31 times, while IHH shares trade at around 66 times its annualised earnings.

Raffles Medical also trades at a price-to-book ratio of 2.16 compared to IHH healthcare which trades at a price-to-book of around 2.27 (after excluding perpetuities and non-controlling interests).

On both counts, Raffles Medical Group looks to be the cheaper option.

Winner: Raffles Medical Group

The Foolish conclusion

All things considered, Raffles Medical Group seems to be the better buy for now. Not only does it have better growth prospects in terms of its size, but Raffles also has a lower net-debt-to-equity ratio and its shares trade at a discount to IHH shares.

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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 has recommended shares of Raffles Medical Group Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in Raffles Medical Group Ltd.