Health Management International Ltd (Uncertainty ahead)

“An investor’s time is required both to monitor current holdings and to investigate potential new investments.” Seth Klarman

Health Management International Ltd (“HMI”) is a healthcare company with presence in Singapore, Malaysia, Indonesia, Cambodia, and Myanmar.

HMI is focused on the delivery of healthcare services. HMI owns and operates two tertiary care hospitals in Malaysia, the flagship Mahkota Medical Centre (“Mahkota“) in Malacca and Regency Specialist Hospital (“Regency”) in Iskandar Malaysia, Johor, which provide a comprehensive suite of medical and surgical disciplines.

To reach out to regional patients, HMI has a network of 21 patient representative offices. With more than 22 years of experience in hospital management, HMI provides project consultancy and advisory services. HMI also owns and operates HMI Institute of Health Sciences in Singapore and Mahkota Institute of Health Sciences and Nursing in Malacca, Malaysia.

For me, healthcare seems to be a sunrise industry, esp. in Singapore; due to the aging population. I won’t be surprised if Singaporeans flock to Johor to seek cheaper treatments.

“When the first shopping malls were built, Sears was in ninety-five percent of them… Now when I invest in a stock, I’ll know to invest in a company that has room to grow.” Peter Lynch

In fact, some of the fastest growing listed companies here are healthcare related eg. Raffles Medical Group and Riverstone Holdings Limited (primarily a manufacturer of disposable nitrile gloves for the clean room and healthcare industry). It appears that the Healthcare industry is a resilient, defensive and growing industry (read here).

As per the quoted report (below), the medical tourism in the region (Southeast Asia) as a whole is a particularly rapid growing industry:

Seeing the doctor, overseas: medical tourism booms in Asia (read here)

The sector benefits from a “perfect storm of an ageing global population, rising affluence and greater choice in quality hospitals”.
The Malaysia’s market has nearly doubled in 2014 since 2010, reaching 770,000 patients and $200 million in revenue last year, according to government figures.
Most medical tourists to Malaysia, are well-heeled visitors from less-developed Indonesia, followed by Indians, Japanese and Chinese. Future growth is expected from the wealthy Middle East
Medical tourism has been identified as one of the key pillars for growth for the Malaysian economy, and is spurred by the introduction of medical tourism related incentives by the Malaysian government and the liberalisation of Medisave for overseas use by the Singapore Ministry of Health.

Base on the financial performance of HMI, revenue growth has been consistent and profit has seen a surge in FY2014 (See above).

Nevertheless, the blemishes in recent years includes:

A drop in profit in FY2010. A quick glance in the FY2010 Annual Report reveals that it is due to start-up losses incurred by Regency Specialist Hospital (which was officially launched in November 2009). Nevertheless, the Group’s net loss narrowed by 75% to S$0.8 million due to Regency’s consistent monthon-month revenue growth.
A drop in profit in FY2012. A quick glance in the FY2012 Annual Report highlighted that the drop in profit (RM0.5 mil) is due to the Regency Specialist Hospital which continued to incur losses and a loss from the wholly-owned education business. (see below)

In comparison to FY2010 & FY2012, the surge in profit in FY2011 (as reported in the FY2011 Annual Report) is due to a net fair value gain from investment properties amounting to RM6.8 million held by HMI associated companies.

In gist, it appears that the hiccups in the earnings in the early years is due to the start-up losses of Regency Specialist Hospital.

A look at the free cash flow of the company reveals that FCF has been increasing exponentially over the years.

A look at the financial statistics of the company revealed mixed results (See below).

The good points:

The quarterly revenue growth (yoy) and quarterly earnings growth are very impressive (at 20.1% and 195% respectively). However, the latter a bit too unrealistic.
Total debt/equity is not high (at 21.39).

The bad points:

The high P/E, Price to Book and EV/EBITDA (as a rule of thumb, any EV/EBITDA below 10 is the sign of a good value) suggest that the stock price is over-valued. Not surprising for a growth stock.
The Current Ratio is not ideal (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
This stock will not appeal to investors looking for high dividend yield. A search in POEMS 2.0 should that dividend yield is N/A.

In view of the rapid earnings growth in recent years, the share price of Health Management International Ltd has been progressively getting higher (see below). However it has dipped slightly recently.

Let’s do a quick study on the trailing PEG and intrinsic value of Health Management International Ltd.

1) Trailing PEG

P/E: 23.6 (from Morningstar, see below)
Dividend Yield (%): 0
EPS compound growth rate: 19.63% (base on 5 years revenue growth rate )

The trailing PEG will be 19.63/(23.6) = 0.83. Which is good (< 1).

2) Intrinsic Value

First let’s look at the estimated 5 years earning growth. I can’t seem to find 5 years earning growth figure, however, I found out that the 5 years revenue growth rate is 19.63%.

Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula.

F = P(1+R)^N where:

F = the future EPS
P = the starting (present) EPS (0.01)
R = compound growth rate (19.63)
N = number of years in the future (5)

Estimated future EPS: 0.0245

I will be estimating the future PE of HMI to be 23.6 (See data from Morningstar above)

Future Stock Price

P=EPSxPE

P = future stock price
EPS = future EPS
PE = future PE

Hence future stock price of HMI is 0.0245 x 23.6 = 0.5782

Intrinsic Value

P=F/(1+R)N

P = present (intrinsic) value
F = future stock price (0.5782)
R = MARR (15% or 0.15)
N = Number of years (5)

Hence, the intrinsic value of HMI is 0.29.

Stock price of HMI on 16 July 2015 is 0.36. There is no margin of safety and percentage difference between the intrinsic value and current stock price is 19%!

In the news:

Recently in May 2015, it was reported that IHH Healthcare Bhd is currently in talks with Health Management International Ltd regarding the acquisition of the latter’s Malacca-based hospital, Mahkota Medical Centre. (read here and here)

As reported in the articles: For Health Management, the deal might have a huge impact on its business. Given that the company has a market value of only S$207 million, the US$250 million price tagged to Mahkota Medical Centre would have an outsized impact on the firm’s balance sheet, even after accounting for the company’s 48.95% ownership stake in the hospital.

Although the sale might net a one-time windfall for Health Management, after the sale, the company would be losing a huge revenue and profit generator. Consequently, HMI may not be as profitable as before.

In summary,

HMI’s narrative has so far been good, and its financial fundamental although not pristine, is good nevertheless.

The trailing PEG seems to suggest that the stock is undervalued, however the calculated intrinsic value appears otherwise (eg. over-valued).

Similar to Neo Group Ltd, Spindex Industries Ltd and Japan Foods Holding Ltd, Health Management International Ltd is one of the company on my radar.

However, the uncertainty over the sale of Mahkota Medical Centre and future revenue growth for HMI (if the Mahkota Medical Centre is sold) has made me hesitant in purchasing HMI shares, even if share prices drop further. I can’t foresee very clearly what lies ahead.

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Warren Buffett

“Buy into a company because you want to own it, not because you want the stock to go up.” Warren Buffett

Nevertheless, once this uncertainty is over(hopefully Mahkota Medical Centre is not sold), and share price dip further, it might be a good chance to purchase the shares of this company.