Can You Profit From This Healthcare Stock in the Long-Term?

2020-08-10     thesmartinvestor
Can You Profit From This Healthcare Stock in the Long-Term?

The healthcare industry is traditionally viewed as a defensive industry to invest in.

However, the COVID-19 pandemic has upended this notion.

Hospitals have witnessed a fall in patient numbers as movement restriction orders kicked in.

Medical tourism, where travellers fly to another country to receive higher-quality medical care, has witnessed dampened demand too.

The trends have caused investors to question if healthcare stocks can hold their own through this crisis.

One company that has seen its fortunes declining during the pandemic is Raffles Medical Group Ltd (SGX: BSL), or RMG.

The group is an integrated, comprehensive healthcare provider that runs a large network of clinics and health screening centres in Singapore and operates medical facilities in 13 other cities across Asia.

RMG also owns the flagship Raffles Hospital in Singapore, as well as Raffles Hospital Chongqing in Chongqing, China that started operations in early 2019.

Given the pandemic, investors may be wondering whether RMG still qualifies as a healthcare stock to own over the long-term?

A downbeat set of earnings

RMG announced a downbeat set of numbers for the first half of 2020.

Revenue dipped slightly by 5.4% year on year to S$241.4 million, mainly due to the deferment of elective surgeries and a drop in offshore patients.

However, operating and net profit fell even more, by 30.2% and 41.6% year on year, as expenses remained high.

The high level of expenses can be attributed to higher depreciation charges from its recently-completed Raffles Hospital Chongqing, as well as higher interest expenses from a heavier debt load.

Cash reserves remained high, though, at S$152.6 million versus S$151.8 million six months ago. Gross debt stood at S$168.4 million, while finance expenses more than doubled to S$2.7 million.

Despite the fall in net profit, there was still around S$7.3 million of free cash flow generated by the business.

The group also maintained its interim dividend of S$0.005 and expects to remain profitable for the rest of the year.

Growing its digital footprint

To be fair, CEO Loo had already admitted in an April interview with CNBC that the group’s business will be significantly hit by the plunge in medical tourism.

He also commented that medical tourism had already stagnated before the pandemic hit due to Singapore being more expensive than other countries.

RMG has other growth initiatives, however, that is focused on growing its digital footprint.

It intends to continue investing in its digital platform, Raffles Connect, to provide enhanced services to patients and updated medical information.

In response to the COVID-19 pandemic, RMG’s insurance arm, Raffles Health Insurance, has also adjusted its marketing initiatives to focus on digital platforms, intending to create a seamless digital experience for its users.

A new and growing trend, telemedicine, is also taking root.

Telehealth involves the use of digital and telecommunication technology to access health care services remotely.

Telemedicine is a subset of telehealth, where patients can consult doctors remotely.

The pandemic has significantly boosted the telemedicine industry and accelerated its adoption among patients.

Raffles Connect was the vital cog in RMG’s telemedicine service offerings during the pandemic as it leveraged on the group’s wide network of doctors and medical professionals to provide comprehensive online health services.

The promise of China

Although the pandemic may have slowed things down for RMG, the group is not sitting still.

Patient loads are gradually returning to pre-COVID levels at both Raffles Hospital in Singapore and Raffles Hospital Chongqing.

The group is also in the process of completing the renovation of its 54,000 square foot medical centre in Beijing, which will offer minimally invasive surgeries to complement its clinical services when it opens in the second half of 2020.

As for Shanghai, RMG is on track for the opening of the 400-bed Raffles Hospital Shanghai, with fitting-out works and recruitment in progress.

However, the actual date of the commencement of operations will still depend on when Shanghai will return to normalcy.

Get Smart: Short-term challenges, long-term potential

CEO Loo has a bold vision for RMG’s future.

He expects its China operations to form a very significant part of the overall business in five to ten years.

The target contribution is around 50-50 between Singapore and China. He believes Singapore can still grow, but only at single-digit rates; while China offers faster growth potential for the group.

RMG may be suffering from strong headwinds in the short-term but is continuing to soldier on with business strategies to solidify its long-term potential.

The company’s sturdy balance sheet and healthy operating cash flow make this a safe stock to own.

Investors, however, may need more than a dose of patience before they can see improvements in RMG’s financials.

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Disclaimer: Royston Yang owns shares in Raffles Medical Group Ltd.

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