Recently, I went to a private hospital for an emergency – or rather what I deemed as an emergency – and the bill was a staggering $350 for a blood test and a plain-vanilla consultation, triple that of a public hospital for Singapore citizens.
As an illustration of the preposterous bill, I incurred a surcharge for a blood test that was done after 5 pm, even though it was 4:50 pm as the laboratory technicians had to work overtime. Case in point, consumers are willing to pay for private healthcare that may seem disproportionate to the value, which in itself is subjective.
Private healthcare providers are comparable and that there is an absolute intrinsic value for investors pumping money to back their businesses.
Raffles Medical Group (Bloomberg: RMFD SP) caught my attention as it has been beaten down by investors, nearing a 5-year low of SGD0.99 per share.
In the latest annual report 2018, the company is making moves in China, bringing the Raffles brand to 1.3 billion Chinese population.
Share price chart of Raffles Medical Group, Jun 2014 – May 2019 (SGD)
Source: Reuters, 3 June 2019
Investors are not showing any love for RMG which has a presence in 14 high-growth Asian cities. Rising affluence and an ageing population are the macro driving forces of healthcare consumption. While the macro indicators continue to point towards increased healthcare spending per household, investors lose interest in RMG at the company level.
The share buy-backs management executed did not catch any attention.
On 22nd and 23rd May, the company purchased 100,000 shares at SGD 1.01 apiece, which is just a whisker below the current share price.
Shares buy-back typically indicates management perspective of an undervaluation of the company. Interestingly, the sturdy balance sheet, healthy profitability, and a rising dividend trend also did not retain investment interest in the Raffles Hospital brand.
Solid balance sheet: RMG has a modest net debt position of just 1.1% of the total capital. Although a net cash position would have been sexier to report, it is worthwhile to note that the company incurred the marginal debt to fund its international footprint expansion. The SGD 116.5 million of debt could be easily covered by annual operating cash flow (before working capital changes) of about SGD 100 million.
RMG leverage position, FY14 – FY18 (%)
Valuation does not justify earnings: While EBITDA margin had shrunken from 23% in FY14 to 20% in FY18, the company’s price-earnings ratio (P/E) has compressed from 32.6x to 26.0x.
In this five-year period, the average P/E was 31.7x or 22% above the current P/E.
In other words, we are now paying 22% less than what we would have paid in FY14 for each dollar of RMG earnings. According to Reuters, the sector RMG operates in trades at an average 32.6x P/E. Thus, RMG at the current price of SGD 1.03 is cheaper than its peers in the healthcare sector.
Profitability, FY14 – FY18 (million SGD and %)
High capacity to grow dividends: RMG dished out SGD 0.025 per share for FY18, representing an 11.1% increase in dividend from the SGD 0.0225 per share for FY17 results.
Should the company maintain the payout in FY19e, it translates into a modest dividend yield of 2.4% over the current share price.
Therefore, I do not expect a detraction in dividends for 2019. The willingness to distribute profits back to shareholders in the form of dividends is an investment plus for me.
Dividend history of RMG, FY14 – FY18 (SG cents and %)
Fundamental support: The fundamental analysis support and resistance have to come from an alignment of interests of stakeholders.
Management bought back shares at SGD 1.01/share in May 2019 was a strong indication that the company’s decision makers believed the company was undervalued. The fundamental (and emotional) support level appears to be at around SGD 1 per share.
Fundamental resistance level: I looked at the outstanding options exercise price. Of the 63.7 million outstanding options granted to employees and directors, 88% is out of the money presently with an average weighted exercise price of SGD 1.25 per share.
Moreover, there is an alignment of interest with the Board of Directors in that the independent directors have about one-quarter of their remuneration tied to the share price performance. Management’s remuneration at SGD 12.4 million in FY18 was the lowest since FY15. With that, I put my faith in management and directors to make the best decisions for shareholders.
RMG is betting on China to catalyse earnings, but patience beckons for investors. The healthcare company is aggressively expanding in China, having opened its Chongqing hospital on 2 January 2019 and will open another hospital in Shanghai by the end of 2020.
According to the 1Q 2019 results, the gestation loss of Raffles Chongqing’s hospital of about SGD 1.8 million per quarter is “within expectation.”
Geographical footprint of RMG
I read the quoted words as no detraction to dividend payouts. And there is no reason to.
Revenue in 1Q 2019 advanced 6.7% year-on-year to SGD 128.3 million, contributed by all divisions that exhibited growths.
Excluding the expected start-up costs of the Chongqing hospital, the net profit would have improved 2.1% year-on-year and the EBITDA to soar 9.3% year-on-year. The company maintained its consistency in generating operating cash (before working capital changes) of SGD 24 million per quarter.
The market is pricing for a weak FY19e report card that could slacken the dividend payout.
On the flipside, there are more positives to be drawn from the latest quarterly report card than the reported figures.
The weekly chart on our proprietary charts show that there’s a huge weekly resistance at $1.165, which remains to be cleared. The obvious support level is at $1.00 and the stock has been trading between this range, since late 2017.
It seems the stock has been in a consolidation phase for about 2.5 years and been flipping between bullish (blue) and bearish (red) mode. But the fact that it has some bullish signals means that there is indecision between the bulls and the bears.
The potential for this stock to bottom out at this range is high and the fundamentals support it.
In a Nutshell
When it comes to any medical situation, we want to be treated as soon and as best care as possible.
For the affluent class, the propensity to consume on quality healthcare is limitless. For the majority of us in the working class, purchasing insurance is a pseudo instalment to private healthcare service.
By virtue of the Raffles brand synonymous with quality, Raffles Medical Group overseas ventures are likely to bear fruits for patient (adjective, not noun) investors who pick this gem near its 5-year low.
For private hospitals (not naming any here), as long as they keep pulling the cheap shots of charging overtime fees, I just don’t see how they could not make money.
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