Raffles Medical

This is one company that seems to have fared better than the rest of the market last month, but then again its share price has been quite volatile lately so it may be something a bit too early to say. But in any case, I'm going to take a look at this company and see if it looks like a good investment.

(Image source: www.rafflesmedicalgroup.com)

Starting off by looking at the profits (no losses in period) of the company in the 2014 annual report. It seems to be having quite good growth with the earnings of the company after tax increasing from $45.5 million in 2010 to $68.0 million in 2014. The growth has also been fairly consistent with each year having a higher earnings that the last (if we exclude the gain from disposal of subsidiary in 2013). Just a side note, I was reading Benjamin Graham and David Dodd's Security Analysis, where they are quite critical on putting too much focus on earning trends as they are unlikely to go on indefinitely. One thing I also notice is a declining ROE from 15.8% in 2010 to 12.6% in 2014 (I'll mention more on this later)

The balance sheet (referring to Q2 2015 report) seems healthy with almost enough cash to tide over their total liabilities. We may want to take this with a pinch of salt as I think that as a healthcare provider, the company would have a high payroll and hence may burn through this cash relatively quickly (the cash is not enough to cover staff costs for 1 year as a reference) The company has quite a low amount of debt, $7.1 million on a $578.2 million equity base, so the company may be able to take on extra debt when and if it plans to expand in the future without relying on more funds from the shareholders.

Back to the 2014 annual report for the cash flow statement. The operating cash flow seems good for 2013 and 2014, with a net decrease in working capital for the 2 years. Cash flow used in investing also seems good, with only a large sum used as payment for an investment property under development, which refers to the extension of Raffles Hospital and Raffles Holland Village.

Just some extra points to take note, there are over 21 million options outstanding in 2014 with over 13 million exercisable at average price of $2.561 and $2.194 respectively, which may dilute the shares, the current number of shares outstanding is 573 million so options outstanding make up around 3.8% of the shares outstanding.

Those are some of the key points that I've been able to pick up from the financial statements. Looking at the share price though, it may be a little pricey at the moment. The share trades at a P/E ratio of 37.8 and has a P/B ratio of 4.5, which is quite high. The share has been holding on while the rest of the market has been dropping quite a lot with the STI in reaching bear market territory this year.

But the earnings of the company may continue to grow further, with earnings from its newly opened medical centre at Shaw not counted and its expansion through acquisition and joint ventures into other countries. The demand for healthcare services is also likely to increase with the aging population facing Singapore and other countries in the region in the near future.

However, I think that the company may not be worth the price. Here's where I bring in the company's ROE. It's been declining and I think it may continue to do so. Without a good economic moat to keep competitors away and for it to be able to profitably expand into new international markets, the ROE of Raffles Medical may continue to decrease as competitors come in to drive down its profit margins, which would definitely eat into its earnings. This is the one reason that I think will make it difficult for the company to continue to expand with high profitability.

So is the company really worth the money? Not in my opinion, but then again, there may be points that I may have overlooked (the devil is always in the details).

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