Saturday, March 7, 2009

Quick Notes on RMG

Brief notes, no time. RMG has 517m shares issues plus 16m options (giving potential 533m shares issued).

1) 08 Full Year results and Valuation

FY08 profit up 35% (excluding 07's exceptional gains), EPS now 5.9c.

At a price of 77c, that gives a PE of 13.
Nett cash of 18m, or 3.5c per share. Excluding cash, the PE would be 12.5.

2) Cyclical aspects. Demand in 4Q

Growth dropped, revenue flat.

YOY revenue in 4Q rose 12%. This is a moderation in the growth rate (22% in 2Q and 17% in 3Q). Q-on-Q, growth was almost flat at 0.14% for Q4.

BT article on Mar 7th, p11, Chen Huifen:
"In 1998, after the start of the crisis, the number of foreigners visiting Singapore for medical tourism dropped almost 35% to 10,698 from 16,418 in 1997. About the same time, the public hospital's market share of in-patient admissions went up, while the private hospital pie shrank."

"Nomura projected a 2% dip for Raffles this year... the decline is likely to be buffered by an increase in day surgery cases and the increasing complexity of cases handled, correlating to higher average revenue per patient."

As of July 08, 1/3 of RMGs patients were medical tourists, 2/3rd locals.

Another data point: during the Asian crisis, occupancy at parkway dropped 20%.
3) Business Model: How falling demand would affect them?

In 08, most of their revenue/profit (60% and 73% respectively) was from the hospital. It would be nice if both these businesses had separate income statements, because I would like to model hospital demand dropping more than healthcare. But they don't, so we have to estimate from the consolidated statement:

Revenue 200m (Hospital 120m, healthcare 80m)
Fixed costs (staff, depreciation, operating leases, and other operating expenses) were 126.8m
Variable costs (inventories and consumables, purchased and contracted services) were 35.4m
Giving PBIT 38m

Note that staff costs were by far the largest component, at 98m.

If revenue declines 2% across the board as predicted by Nomura, PBIT would decline 15% to 32.2m.

A worse scenario. If foreign visitors to hospital (1/3 of patients) decline 35%, and local visitors (2/3 of patients) decline 20%, and healthcare revenue declines 10%, this gives a revenue of 156m (down 22%), leading to a tiny profit of just 1.6m.

All this is just guesswork anyway....don't get too carried away with the modeling. Just to illustrate, their business model is highly cyclical due to high fixed costs - they can't just fire all their staff because they have less visitors.

They may not be able even to cut bonuses, as they are trying to recruit specialists, and there is a shortage of medical staff. A lot would depend on how much of their staff's pay was variable (eg: bonus) or fixed - could mean 10-20m difference in profit.

Do RMG's staff (both GPs and specialists) work on comission according to the number of operations they do? If so it would cushion the business model in a downturn. But also has the effect of making the doctors as trustworthy as used car salesmen (heard many stories abt this in Singapore - not yet abt RMG though).

4) Long term Growth Potential

Hospital licensed to operate 380 beds. In 2H08, 30 new beds planned to be added to give 230 operational beds. (Need to confirm if this was done, try their Annual report when it comes out). Assuming all beds were utilized in 2008, giving an average of 215 beds for the year, long term this gives a 41% increase plus if 304 beds could be utilized (ie: assuming an 80% utilization rate). Equivalent to +13.8m hospital profit (based on the FY08 28m profits from the Hospital segment) - actually would be slightly more since depreciation remains the same. Would increase their PBIT by 36%. Would reduce their long term (ex-cash) PE from 12.5 to 8.

5) Conclusion

With long term growth potential, their valuation looks reasonable.

Biggest risk is if thir revenues drop. Even a small revenue drop may have large effect on their (leveraged ie: high fixed costs) business model. A lot would depend on how much of their staff's pay was variable (eg: bonus, commission) or fixed.