1) Sudden drop in Share Price
The once mighty Raffles Medical share price seems to be suffering from a bout of flu. For the past one year, its share price has steadily declined from a high of SGD 1.55 to SGD 1.16, representing a 25% drop.
And in the recent month, there was a sudden drop in its share price from SGD 1.29 (31 July 2017) to SGD 1.16 (8 Aug 2017), a more than 10% drop!
“Generally, the greater the stigma or revulsion, the better the bargain.”
— Seth Klarman
2) Poor Earnings
Earnings in general for the recent and past quarters have been anemic (if not lower) mainly due Raffles Medical’s expansion. And in the recent quarter, there was a hint in the slowing medical tourism.
Earnings per share for the 2nd quarter was at 0.96 Singapore cents, unchanged from previous year’s corresponding quarter.
The company attributed its performance to lower income from the healthcare services division, as well as softer-than-expected demand from foreign patients.
The increase in turnover was offset by higher staff costs which grew 3 per cent year-on-year to $61.7 million. The company attributed this to the recruitment of more specialists, consultants, management and clinical staff ahead of the opening of an extension to Raffles Hospital in North Bridge Road, which will start operating in the last quarter of this year.
- Raffles Medical Group Ltd’s Latest Earnings: What Investors Need to Know (read here)
- Raffles Medical Group’s Q2 profits marginally higher (read here)
This anemic performance was also seen in the 1st quarter 2017 results. For instance, revenue was down 1.7% YOY, while earnings per share was down 1.1% YOY.
The Group’s profitability then was affected by the lower wage credit received in Q1 2017 of S$0.7 million as compared to S$1.9 million in Q1 2016.
- Highlights of Q1 2017 Performance – Raffles Medical Group (read here)
For the FY 2016 performance, revenue was up 15.4% YOY while earnings was again down 0.2% YOY.
The reasons were again similar (as per recent quarter’s) – but increase in staff costs was due to the new medical centre in Raffles Holland V: “The strong revenue performance was offset by greater staff costs, operating expenses and consumables. The increase in staff costs was due to manpower recruitment to cater for expanded business operations and the new medical centre in Raffles Holland V.”
- RafflesMedicalGroup Announces Record Revenue for FY 2016 (read here)
- Raffles Medical Group reports 1.3% rise in FY2016 net profit as costs increase (read here)
3) Healthy Cash Position despite Expansion
- RafflesHospital Extension: Contribute an additional 220,000 square feet in
gross floor area. To be completed in 2017.
- RafflesHospital Shanghai: 400-bed hospital. To be operational by second half 2019.
- RafflesHospital Chongqing: 700-bed international tertiary hospital. To be operational by second half 2018.
- RMG investments in MCH, RafflesHospital Shanghai (400-bed) and RafflesHospital Extension amounted to S$45.6 million in 2015.
- RMG investments in RafflesHospitalShanghai and RafflesHospital Extension together with capital expenditure for business expansion amounted to S$14.4 million in Q1 2017.
- FY 2016: Cash position of S$111.9 million
- Q1 2017 : Cash position of S$119.4 million
- Q2 2017: Cash position of S$112.4 million
4) Is the Current Stock Price Cheap?
The stock price as of Raffles Medical Group Ltd on 8 Aug 2017 is SGD 1.165. So is this price undervalued? To give us a clue of that, let’s look at the Trailing PEG and Intrinsic Value of the stock.
a) Trailing PEG
Trailing P/E: 29.12
Trailing annual dividend yield (%): 1.69
The trailing PEG will be 29.12/(1.69+8.01) = 3. Which is not good (above 1).
b) Intrinsic Value
First, let’s look at the estimated 10 years earning average growth which is 8.01%. Let’s assume a 20% discount, the figure will be 6.4%.
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 (0.04)
- R = compound growth rate (6.4)
- N = number of years in the future (5)
Estimated future EPS: 0.0545
I will be estimating the future PE of Raffles Medical to be 25.12 (See data from Morningstar below) Average of the PE from 2007 to 2016.
Future Stock Price
- P = future stock price
- EPS = future EPS
- PE = future PE
Hence future stock price of Raffles Medical Group Ltd is 0.0545 x 25.12= 1.369
- P = present (intrinsic) value
- F = future stock price (1.369)
- R = MARR (15% or 0.15)
- N = Number of years (5)
Hence, the intrinsic value of Raffles Medical Group Ltd is SGD 0.68.
Stock price of Raffles Medical Group Ltd on 8 Aug 2017 is SGD 1.165. There no margin of safety.
The Trailing PEG and Estimated Intrinsic Value seem to suggest that the current stock price is still not undervalued (not cheap) despite the sharp fall in the price recently.
Well, business wise, the group is doing well in expanding. A slowdown in Medical Tourism and capital expenditure for expansion could be just a hiccup (from a long term view).. but a prolong depressed earnings performance might cause the share price to be lowered further and present a better buying opportunity.
Investors, in general, do not like unpredictability. The recent expansion and subdued earnings due to expansion seem to suggest that. As demonstrated by the recent share price decline.
“As Graham, Dodd and Buffett have all said, you should always remember that you don’t have to swing at every pitch. You can wait for opportunities that fit your criteria and if you don’t find them, patiently wait. Deciding not to act is still a decision.”
— Seth Klarman