Raffles Medical Group Ltd (SGX: BSL) is currently the worst-performing stock in my portfolio. I added the healthcare company to my portfolio back in 2014 at a split-adjusted share price of S$1.31 per share. Today, the private healthcare provider trades at S$0.95 per share, which translates to a total loss of around 27%, excluding dividends.
A challenging environment
Raffles Medical was once a stock market darling. The healthcare group was expanding its network of clinics in Singapore and set up its maiden hospital in 2002. The hospital was hugely successful and became the group’s largest contributor to profits.
However, since 2014, Raffles Medical’s growth slowed tremendously. Singapore’s private family medicine scene started to get overcrowded, resulting in slower expansion of Raffles Medical general practice clinics.
Its hospital also suffered from slower medical tourism growth due to competition from other regional destinations such as Thailand and Malaysia.
Raffles Medical also bought into a stake in a network of clinics in China that were facing losses. These losses put pressure on Raffles Medical’s bottom line.
All of this resulted in muted growth over the last five years. The market, however, had not expected this. In 2014, Raffles Medical shares were trading at close to 45 times its earnings at its peak. The optimism soon turned into despair as market participants began selling Raffles Medical shares back down to a more reasonable earnings multiple.
What’s happening now
It is clear that the past five years have not been smooth sailing for the group. However, the future could look quite different. Raffles Medical has set the foundation for future growth by opening a hospital in Chongqing, China. It’s also slated to open a hospital in Shanghai, China, later this year.
Although the two hospitals are expected to incur gestational losses over the next three years, further pressuring the group’s bottom line, its long-term earnings potential makes them a huge growth opportunity.
China’s private healthcare market is growing at a rapid pace. The growing middle-income population and penetration of private healthcare insurance are key drivers of this growth.
Even with the two hospitals incurring losses, Raffles Medical’s core operation in Singapore will still be highly profitable and will ensure that the group is still generating a healthy amount of cash flow from operations to see it through its expansion into China.
Why I’m still optimistic
At the time of writing, shares of Raffles Medical Group trade at much more palatable valuations. Even with the Raffles Hospital Chongqing pressuring its earnings over the last two quarters, Raffles still trades at around 31 times its annualised earnings.
This is much lower than it used to trade back in 2014. On top of that, the company looks poised for growth.
The two new hospitals In China could become significant contributors to the group’s profit in the future. When you consider the fact that its one hospital in Singapore now contributes more than two-thirds of the company’s profit, imagine how two new hospitals could affect its earnings in the future.
Although it hurts me to see that my investment has suffered significant losses over a five-year period, I’m still optimistic about Raffles Medical Group.
The health care giant is in great hands, too. Founder and chief executive Loo Choon Yong has guided Raffles Medical to where it is today. With him at the helm, I believe Raffles remains in safe hands. He is also an extremely ambitious but sensible operator who continues to look for expansion opportunities whilst maintaining a healthy balance sheet.
I’m hopeful my investment will eventually turn good. Although I acknowledge that Raffles Medical’s entry into China is a risky endeavour, I believe the potential returns make it a good bet. As such, I’m happy to stay patient (mind the pun) and give Raffles Medical time to prove its worth.
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.