1 Simple Number to Understand 3 Parts of Raffles Medical Group

Raffles Medical Group Ltd (SGX: BSL) runs hospital and healthcare services in Singapore. It also has a network of clinics in five countries and 14 cities. Also, it has two hospitals (one under development) in China.

In this article, I want to dig deeper into Raffles Medical’s return on equity, or ROE.

## The choice of ROE

Why the ROE some of you might be asking? That’s because the financial metric gives investors important insight on a company’s ability to generate a profit using the shareholders’ capital it has.

An ROE of 20% means that a company generates \$0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher the ROE, the more profitable a company is. A high ROE can also be a sign that a company has a high quality business.

That being said, it’s worth noting that the use of high leverage – which increases the financial risk faced by a company – can also increase a company’s ROE. So, that’s something to observe.

## Calculating the ROE

The ROE can be calculated using the following formula, which is the way many investors do it:

ROE = Net Profit / Shareholder’s Equity

But, the ROE can also be calculated using a different approach shown below:

ROE = Asset Turnover x Net Profit Margin x Leverage Ratio

Doing so will reveal three important aspects about a company: How well it is managing its assets, how efficient it is at turning revenue into profit, and how much financial risk it could be taking on. For more information about this formula for ROE, you can go here.

With that, let’s turn our attention to the ROE of Raffles Medical.

## The actual numbers

The asset turnover measures the efficiency of a company in using its assets to generate revenue. It is calculated by dividing a company’s total revenue by its assets.

For Raffles Medical, it had total revenue of S\$ 489.1 million, and total assets of S\$ 1, 116.3 million for its fiscal year ended 31 December 2018 (FY2018). This gives it an asset turnover of 0.44.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses.In FY2018, Raffles Medical had a net profit margin of 14.5%, given its net profit of S\$70.8 million and revenue of S\$ 489.1 million.

Lastly, we have the leverage ratio, which shows the relationship of a company’s total assets to its equity. It is calculated by dividing total assets by equity. A higher ratio means that a company is funding its assets with more liabilities, hence resulting in higher risk. In FY2018, Raffles Medical had total assets and total equity of S\$ 1,116.3 million and S\$ 816.6 million, respectively. This gives a leverage ratio of 1.37.

When we put all the numbers together, we arrive at an ROE of 9%.

## Foolish takeaway

Return on equity is a good metric to understand the quality of a business. Nevertheless, investors should be aware of (and understand) all the three components that make up the ROE. In general, I will pay more attention to asset turnover and profit margin since those two metrics better reflect Raffles Medical’s underlying business performance.

Last but not least, calculating the ROE is just the start of our research of a company. We should also compare Raffles Medical’s ROE with its peers, as well as its historical ROE, to get a better understanding of Raffles Medical’s performance.

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\$Raffles Medical(BSL.SI)

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Raffles Medical Group Ltd: Key Risks and When I’ll Sell

Despite its poor share price performance over the last few years, Raffles Medical Group Ltd (SGX: BSL) remains a key part of my portfolio. Its long-term growth potential in China coupled with its strong core business and relatively low valuation make me believe the healthcare operator will be a great long-term winner.

However, despite my optimism, there are risks to the investment. Here are two that could potentially derail its growth — and what it would take for me to consider selling.

## No. 1: Stumbling block in China

With the opening of two new hospitals in China, the middle kingdom could be the next avenue of growth for Raffles Medical. However, expansion into China comes with unique challenges.

If the company is unable to attract patients to its hospitals, the road to profitability may take longer than expected.

Withits expansion into China, Raffles Medical will also be exposed to currency and regulatory risk.

## No. 2: Cash flow issues

Raffles Medical has spent a sizeable amount of money to open the two hospitals in China. It now has a net debt of S\$23 million. The company again burned cash in the second quarter of 2019 in preparation for the opening of its hospital in Shanghai.

Although its balance sheet still remains relatively robust, an unexpected extended period of cash burn may weaken the healthcare operator’s balance sheet.

## Scenarios in which I might sell

For now, Raffles Medical remains a key part of my portfolio, and I intend to keep it that way. My investment thesis revolves around its strong core business in Singapore, huge growth potential in China, and a prudent management team. However, this could change in the future.

Alarm bells will ring if growth in China runs into obstacles and the company is unable to turn its China operations profitable over the next five years, On top of that, I will be keeping an eye on the company’s cash burn rate in regards to its operation in China. Currently, the company remains in a robust financial position. But if its balance sheet weakens considerably and it continues to burn cash in China with no end in sight, I may have to reconsider my position.

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.

\$Raffles Medical(BSL.SI)

Here’s How Much You Would Have Made If You Had Invested S\$1,000 in Raffles Medical Group 20 Years Ago

Over the last five years, Raffles Medical Group Ltd (SGX: BSL) shares have tumbled 28% and now trade close to a five-year low.However, that is not to say that the healthcare giant has not been a massive winner over the longer term. Since it was listed in Singapore in 2000, the healthcare provider has grown at a breakneck pace, becoming one of Singapore’s most recognisable healthcare brands.

## Looking back

I took a trip down memory lane to see how much an investor would have made if they had invested in Raffles Medical around 20 years ago.

In 2000, shares of Raffles Medical traded at a split-adjusted price of 23.5 Singapore cents per share. Today, Raffles Medical shares exchange hands for around 96.5 Singapore cents. That equates to a 310.6% gain in that time frame. For perspective, \$1,000 invested at that time would now be worth S\$4,106.

Doing the math, that translates to a decent annualised growth of 7.3%. On top of that, Raffles Medical has been a regular payer of dividends. Last year, Raffles Medical paid out a dividend of 2.5 Singapore cents per share. Based on an initial outlay of 23.5 Singapore cents per share in 2000, that would translate into a juicy 10.6% annual yield on the initial investment.

## Not a smooth ride

However, the returns of the stock were by no means smooth. From 2000 to 2008, its shares rose by almost 100%. Unfortunately, the great financial crisis of 2008 scared off many investors who began selling down the stock, which soon returned to its 2000 level.

But Raffles Medical in 2009 was in a much better position than it was in 2000. Its 2009 revenue was three times more than it was in 2000, while its profit was more than seven times higher.

Unsurprisingly, the dip in its share price then was short-lived. Its shares soon started regaining all that it had lost in 2008 and more.

## Lessons learnt

There are a few lessons that can be learnt from Raffles Medical’s twenty-year history.

1. Never underestimate the power of long-term investing. Despite the volatility, investors who were patient enough to hold on to its shares for the whole 20 years have been well-rewarded.

2. Do not panic during a broad market sell-off. As seen in 2008, even fundamentally sound companies suffered major sell-downs. As investors, it is easy to panic and push the sell button at the first sign of trouble. However, investors who did sell would have not enjoyed the massive gains that Raffles Medical has afforded loyal shareholders.

Today, Raffles Medical shares have again suffered a massive sell-down. It currently trades at around 30.6 times its annualised earnings. At a glance, this may not seem excessively cheap. However, there are a few things to note.

First, Raffles Medical Group earnings have been dragged down due to near-term teething losses from the opening of its first hospital in China. Second, despite the risks involved, the new China hospitals could potentially be a huge driver of profits over the longer term. Co-founder and chairman, Dr. Loo Choon Yong, is hopeful that China will contribute more than 50% of the group’s revenue in the future.

As such, its shares could see a massive boost once its China hospitals start turning profitable. If the past is anything to go by and considering the healthcare provider’s massive potential in China, I think it is likely that patient investors who pick up shares today will be well-rewarded in the next 20 years.

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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.

\$Raffles Medical(BSL.SI)

Raffles Medical Group Ltd’s Share Price Plunged 20% in 2019. Here’s Why.

Raffles Medical Group Ltd (SGX: BSL) runs hospital and healthcare services in Singapore. It also has a network of clinics in five countries and thirteen cities. Furthermore, it has two hospitals (one under development) in China.

Year-to-date, Raffles Medical’s share price declined by 20% from its peak of S\$1.20. Here, let’s try to understand what might have caused the decline.

## The culprit

There are many reasons that cause the stock price of a company to move. Generally, stock price movement is driven either by business performance or investor sentiments.

The former is related to how a business performs in a given period, looking at metrics like growth, margins, production and others. Here, the ultimate driver is profit. The latter is driven more by investors’ overall mood, which is described by emotional pairs such as greed and fear, optimistic and pessimistic, bull and bear, etc.

In this case of Raffles Medical, I believe both factors contribute to the recent decline in its share price.

In the first half of 2019, Raffles Medical reported that revenue was up by 6.2% year-on-year to S\$255.3 million. Yet, profit for the period fell by 13.5% to S\$27.9 million. The decline in profit was driven mainly by gestation losses by Raffles Hospital Chongqing.

Clearly, the decline in net profit has impacted the company’s share price. On a positive note, Raffles Medical continued to grow its top-line.

Overall, I feel it’s not all that bad.

Nevertheless, the market clearly expected more from the company. This might explain the 20% decline in the healthcare provider’s share price (which is more than the 13.5% decline in net profit for the period).

Going forward, Raffles Medical needs to prove that it can ramp up the operation of its hospitals in China to improve its bottom-line. Moreover, it will also need to control its cost to improve its profitability.Failure to improve its profitability will likely put its share price in the firing line again.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended the shares of Raffles Medical Group Ltd.

\$Raffles Medical(BSL.SI)

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.

\$Raffles Medical(BSL.SI)

Best Healthcare Stock: Raffles Medical Group Ltd or Singapore O&G Ltd?

Healthcare companies are generally considered “defensive” stocks since their services are needed in both the good and the bad times. Given their defensive nature and the current fears in the market about a recession, it is not surprising to see that investors are attracted to these stocks.

For those who are seeking investment ideas in this sector, you might want to know which companies you should invest in. In this article, I’ll compare two companies that have exposure to this sector, namely Raffles Medical Group Ltd (SGX: BSL) and Singapore O&G Ltd. (SGX: 1D8).

What I want to find out here is which of the two is the better deal now for investors.

## Valuation

To find out which is cheaper, I’ll compare the valuation metrics of both companies. The three valuation metrics I will focus on are the price-to-book (PB) ratio, price-to-earnings (PE) ratio, and dividend yield.

To begin with, Raffles Medical and Singapore O&G have PB ratios of 2.2 and 3.8, respectively. The low PB ratio for Raffles Medical suggests that it has a lower valuation.

Next, Raffles Medical and Singapore O&G have PE ratios of 26.1 and 22.8, respectively. Here, Singapore O&G appears to have a lower valuation.

Last but not least, the dividend yields for Raffles Medical and Singapore O&G are 2.6% and 4.2%, respectively. The higher a stock’s yield, the lower its valuation. Thus, we can see that Singapore O&G has the lower valuation in terms of the dividend yield.

From the above, we can argue that Singapore O&G is probably the cheaper stock among the two due to its low PE ratio and high dividend yield.

## Conclusion

For investors, the main takeaway is that Singapore O&G is probably the better deal now due to its low valuation. Yet, investors should also consider the prospects of both companies before investing in their stocks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended the shares of Raffles Medical Holdings Ltd and Singapore O&G Ltd.

\$Raffles Medical(BSL.SI)