I always like healthcare stocks. I do personally own some shares of Riverstone Holdings. The company is a natural rubber and nitrile (synthetic rubber) glove manufacturer specializing in clean-room and healthcare gloves.
I have also written some posts about other listed Healthcare companies.
- Random thoughts on RHT Health Trust (read here)
- Bloomage Biotechnology Corp (963 HK) – Quick Study (read here)
- Revisit Riverstone Intrinsic Value (read here)
- Real Nutriceutical Group Ltd (HK:2010) (Time to buy?) (read here)
- Health Management International Ltd (Uncertainty ahead) (read here)
- Riverstone Holdings Limited (The one that got away) (read here)
- May Day and Q&M Dental Group (read here)
I am sure people who are avid readers of the Motley Fools online articles will be keenly aware of Raffles Medical (read here).
A close second would be death-care stocks. After all, we all have to die someday. I used to own Nirvana Asia LTd shares before the company was delisted (from the Hong Kong Stock market). Currently, I own shares of Fu Shou Yuan International Group Ltd.
Personally, in recent times, I’ve stumbled across quite a number of articles about healthcare stocks listed in Singapore, in particular, some of the newer (and smaller market capitalized) stocks.
In general, given the aging population trend, increasing government subsidies in healthcare in this part of the world, and the rising middle class in many Asian cities, it is not surprising that many investors have a penchant for healthcare stocks listed here.
As a sector, in comparison to other sectors, their average PE appears rather high.
- Singapore Healthcare Stocks Kick Off 2017 on Strong Note (read here)
I felt that I have not reviewed this sector in sufficient details, especially given the number of newly listed healthcare stocks. Many of them are healthcare services providers eg. doctors operating in clinics or hospitals.
Firstly, yes, healthcare sector by definition is a very defensive sector (in good or bad economic times, people do fall ill and need to see doctors. And with rising age, we need heath-care more).
I do not work in the healthcare sector, but I always felt that being a doctor is a very respectable profession. I am not sure about how other professions function – but in comparison to my own profession in the construction industry, I felt that people do value the advice of doctors more. After all, it is your health (or life) you are talking about here.
Well, I may be wrong, but (from the way I see it) in other professions eg. designers, engineers, architects, lawyers, accountants, etc….the clients generally engage managers in auditing their work or set schedules or deadlines for them to comply. On the other hand, there is a certain amount of autonomy in practicing as a doctor. Well, as a ‘client’, if you don’t agree with the advice from this doctor, you could always go seek another doctor’s consultation. But I doubt you can ‘manage’ any doctor.
In addition, doctors have the ‘divine power’ to issue medical certificates so that we can be excused from work.
However, from the point of view of an investor, there is also a certain risk in choosing a company that is highly dependent on the competency of a few highly qualified (and highly paid) professionals. People, unlike machines, do ‘vote’ with their feet if they dislike the management or have better offers elsewhere. The effect of a ‘superstar’ doctor leaving the organization would be keenly felt (by the drop in revenue). Hence, I always like companies which generally employ low-skilled workers whom can be easily replaced (and has less overhead cost, and easy to train). So yes, a healthcare provider company has this ‘wild card’ or variable component that makes it kind of unpredictable.
Put it in another way, I like stocks such as Colex, 800 Super, ISOTeam, Sheng Siong, Old Chang Kee, Vicom, Riverstone…. In a very simplistic way, I see their business as not needing highly paid or expensively trained (with tertiary education) professionals. In comparison, these companies can easily source for a replacement for any employee resigning.
- Colex / 800 Super: Waste collection business —- workers (with basic education) & foreign workers.
- ISOTeam: Building & Estate maintenance — contractors & workers (with basic education).
- Sheng Shiong: Supermarket chain —- cashiers, packers, storemen, drivers (all with basic education).
- Old Chang Kee: Food on the go — aunties/retirees.
- Vicom: Vehicle maintenance/material testing — mechanics, technicians (with basic education).
- Riverstone: Gloves manufacturer – workers / foreign workers (with basic education).
From another angle – a company that provides healthcare service is different from a company that manufactures and sells healthcare products (be it gloves, mask, instruments, supplements, medicine, etc…).
I find products more predictable. Yes, there are the occasional foreign worker levies (which has impacted many of the glove manufacturers in Malaysia), material cost fluctuations, forex risks… etc.. but I find people more unpredictable.
- New foreign worker levy rule weighs on manufacturers (read here)
So with so many healthcare stocks listed in our small Singapore Stock Market — one can be spoilt for choice. Nevertheless, I do find current valuations on the expensive side– but I always felt it is only a matter of time when valuations become attractive again.
Among these, I find many similarities between TalkMed Group and Singapore O&G.
TalkMed Group Ltd (SGX: 5G3) is a relatively new company in the Singapore stock market. It has a market capitalization of approx. S$1 billion and was listed only in January 2014.
TalkMed is essentially a group of doctors who provide tertiary healthcare services in the field of medical oncology, stem cell transplant, and palliative care to oncology patients. Oncology is a branch of medicine that deals with cancer. The company’s services are provided through the Parkway Cancer Centre.
Singapore O&G Ltd (SGX: 41X) is also a relatively tiny new company in the Singapore stock market. It has a market capitalization of approx. S$330 million and was listed only in June 2015.
Singapore O&G is a healthcare services provider that specialize in women’s wellness. The O&G in its name is an abbreviation of “obstetrics and gynaecology.”
The stock prices of these 2 companies are doing well (ever since they were listed), albeit for only short periods.
Both these companies operate primarily in Singapore.
Nevertheless, TalkMed entered Vietnam in 2014. By 2015, it had made S$0.33 million in revenue from the country, which amounts to merely 0.5% of total revenue during the year.
TalkMed also holds a 30% stake in Hong Kong Integrated Oncology Centre Holdings Limited (“HKH”). HKH is the controlling shareholder and operator of an integrated oncology centre known as Hong Kong Integrated Oncology Centre Limited (“HKIOC”) which commenced operations in May 2015. HKIOC now provides a comprehensive range of treatment (including surgery, radiotherapy, and medication), diagnostic imaging and endoscopy services in Hong Kong.
Foreign patients account for the majority (more than 60%) of TalkMed’s patient-load in the past few years.
TalkMed currently provides medical oncology services and palliative care services with thirteen doctors at nine clinics in Gleneagles Hospital Singapore, Mount Elizabeth Hospital Singapore, Mount Elizabeth Medical Centre, Mount Elizabeth Novena Specialist Centre Singapore and Parkway East Hospital, which are hospitals operated by PHS.
In the case of Singapore O&G: As at 31 December 2016, the Group had a total of ten Specialist Medical Practitioners:
- 6 O&G Specialists;
- 3 Cancer Specialists: One Gynae-Oncologist and two Breast and General Surgeons;
- 1 Dermatologist.
It appears that majority of Singapore O&G’s revenue come from local patients. To quote from their 2016 Annual report: “We continue to experience encouraging support from patients residing in Singapore and the Company is looking at alternatives to increase patient traffic from our neighboring countries.”
In addition, the majority (60.9%) of Singapore O&G revenue is contributed by the Obstetrics & Gynaecology segments.
Macro Trend
Before moving onto the financials….given the fact that the trend in Singapore is that of an aging society with falling birth rate. In that sense, Singapore O&G’s focus on Obstetrics & Gynaecology in Singapore seems somewhat lackluster in terms of the future growth prospect when compared to TalkMed. After all, our risk of getting cancer only increases with age.
“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” Warren Buffett
Management from the ground
However, that is just the macro trend. When I compare the beginning paragraphs of the 2016 Annual Reports of Singapore O&G and TalkMed… I can see that Singapore O&G appears to be better managed.
“SOG’s financial performance exceeded internal forecasts and more importantly, we are able to meet the investment community’s expectations…. we achieved a 74.7% increase in gross revenue of S$28.7 million and a 64.8% increase in net profit of S$8.8 million over the previous year. Our net profit margin remains healthy at 30.7%.”
In comparison, this is what I read in TalkMed’s Annual Report (emphasis mine):
“For FY2016, our revenue improved by some S$3.20 million or 4.9% to S$68.91 million. However, total operating expenses saw a more than proportionate increase of 15.8%, or some S$2.82 million to S$20.70 million. Employee benefits for FY2016 increased mainly due to an increase in staff salary, higher bonuses paid out and additional staff recruited during the year to support growing business activities. Operating lease expenses increased…… Other operating expenses increased mainly due to the full-year effect of overhead expenses incurred by Stem Med which commenced operations in July 2015. In addition, for FY2016, the Group incurred a share of loss of its associated company, Hong Kong Integrated Oncology Centre Holdings Limited (“HKH”), of some S$3.63 million. As a result of the above factors, the Group’s FY2016 profit attributable to shareholders was relatively unchanged at S$37.39 million.”
No doubt Oncology appears to be a more lucrative field as compared to Obstetrics & Gynaecology eg. $37.39 million profit from a group of 13 doctors (TalkMed) vs $8.8 million profit from a group of 1o doctors (Singapore O&G). -> The difference is obvious.
However, it seems like overhead expenses (in the case of TalkMed) are also equally expensive.
Although not all great investors place a high emphasis on management (a good management to many, is not an economic moat), but there are cases whereby bad management can really make a very negative difference.
And perhaps for healthcare providers, a strong leadership would have a positive influence on their staffs… these are people they are dealing with. The structure of the company (esp. for a small company) by itself seems to be highly dependent on the leadership quality… I doubt any ‘fool’ can confidently manage a bunch of ‘superstar’ doctors. Again, this (emphasis on management) adds another layer of complexity in evaluating the company.
- Healthway: A tale of how risky loans made a firm sick (read here)
- Healthway Medical Corporation widens Q4 loss on allowance for doubtful loan receivables (read here)
Reading Singapore O&G Annual Report, I can sense the emphasis by the management in looking for doctors who share their passion in helping patients.
Historical financial performance
Before we study in details their financials, let’s take a peek at the trends of their historical financial data.
| TalkMed | ||||
| Year | 2014 | 2015 | 2016 | 2017 |
| Total Dividend Amount | $0.03270 | $0.06950 | $0.04585 | $0.02283 |
Base on the above data, my impression is that although TalkMed’s revenue has been trending up since 2010, this upward trend is not reflected in their resultant profit. This failure to translate increasing revenue to incremental increase in profit is not limited to just the year 2016. It appears that expansion overseas does come with the unforeseen risks.
Despite the high profitability of the Oncology practice, this would not matter much if this does not translate to profits for shareholders. Is the company investor friendly?
This is in contrast to Singapore O&G, whereby increasing revenue translates to incremental increase in profit. In fact, the upward trend in profit is more pronounced in recent years.
Consequently, dividend payout in the case of Singapore O&G has been steadily increasingly (in step with the profit increase). I do not see this, in the case of TalkMed.
Looking at the ROE, ROA and ROIC (see below), for both companies there is an overall downward trend.
However, I can only obtain 3 years data for Singapore O&G. Basically, there isn’t much historical data for both companies. Nevertheless, the ROE, ROA and ROIC values are high in the case for TalkMed. Well Singapore O&G’s ROE, ROA and ROIC values aren’t exactly low either.
Singapore O&G’s Earning per Share seems to be trending up. However, there are really insufficient data (only a few years) to make any solid conclusion.
Fundamentals
See below data from Yahoo Finance dated 21 April 2017.
Valuation
- The Trailing P/E, Price to Book and EV/EBITDA all seem to suggest that the stock price is on the high side (over-priced). Exception: TalkMed’s EV/EBITDA is less than 10. (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).
Profitability and Management Effectiveness
- These values are on the high side which is good. Singapore O&G’s ROA is just average.
Balance Sheet
- With negligible debt, there is not much to complain about.
- However, TalkMed’s current ratio is rather high. A high current ratio can be a sign of problems in managing working capital. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
In summary, I can’t really see any major flaws in the fundamentals except that the valuations are rather high. Both have good fundamentals.
If one is to compare the two, I would say TalkMed has stronger fundamentals, as its profitability, management effectiveness, and the balance sheet is much stronger. But that is only base on the current fundamentals.
Trailing PEG and Intrinsic Value
Let’s do a quick study on the respective current share price of TalkMed (S$ 0.89) and Singapore O&G (S$ 1.39) – via their Trailing PEG and Intrinsic Values.
- Trailing PEG
The trailing PEG values of both stocks are more than 1, which is not good.
- Intrinsic Value
The actual EPS value of TalkMed for 2012 is $5,793.00. Which I find not feasible to use in the intrinsic value calculation. In addition, there are no EPS data for the year 2007 to 2011, since the company was newly listed.
Well, the assumption is that from 2007 o 2012, the EPS is $0.06 … yes, the intrinsic value is not really accurate given the lack of historical data.
Nevertheless, the calculated intrinsic value of $0.87 is lower than TalkMed’s current stock price of $0.89, hence there is no margin of safety. However it is close.
For Singapore O&G, there are no EPS data for the year 2007 to 2013, since the company was newly listed.
Well, the assumption is that from 2007 o 2013, the EPS is $0.03 … yes, the intrinsic value is not really accurate given the lack of historical data.
Nevertheless, the calculated intrinsic value of $0.41 is lower than Singapore O&G’s current stock price of $1.39, hence there is no margin of safety.
In Summary
Well, it is obvious that the share prices of these two companies are expensive (with little margin of safety).
However, from what I have read, given the choice, my preference would be with Singapore O&G. Hopefully one day, its share price would drop low enough such that there is a comfortable margin of safety…
This stock would be on my radar. Nevertheless, think I should read up on more healthcare stocks.
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