Raffles Medical reported their FY2023 results yesterday morning. Revenue and net profit dropped by 16% and 37% respectively. Given the Q3 update, the drop was unexpected. I was curious though why the drop in net profit is so much higher in second half as compared to the first half. I mean the decrease in Covid related activities should have affected 1H too.
A look at the P&L statement shows that there is a marked increase in insurance service expenses. It was about $60 mil in 1H but increased by around 20% to $72 mil in 2H. On a full year basis, this expenses has increased by a whooping $40 mil, which definitely has an impact on the profit.
The question in my mind is whether this expense will continue to stay at this level going forward or are we going to see it creeping up in the coming years?
With new information, I think it is necessary to think how things would be like for Raffles Medical post Covid. Before that, I do think they have done well during the pandemic. They adapted and responded well to the crisis, and even did better than pre-Covid! Who would have thought of that, at the beginning of the pandemic?
A comparison of their current number to FY2018 shows that revenue and net profit, compounded at 7.6% and 5.0% respectively. It looks low but do not forget that during this period, they have built 3 hospitals in China! And if we look at free cash flow, it has stayed pretty stable compared to last year and has increased by 170%, compared to FY2018.
Will growth come back in the next few years?
My take is healthcare services segment should be stable. Hospital services should continue to see growth but I am unsure how much longer it would take before hospitals in Shanghai and Chongqing to breakeven. Also, can the increase in insurance expenses be contained?
I decided to sell 1/3 of my holdings as I was over optimistic of their growth last year. I thought the growth in their hospital segment could mitigate the drop in healthcare segment. By selling part of my holdings, the new position would be a better reflection of where I think they stand among my growth counters.
As for Untied Hampshire, I decided to divest it fully since I have my doubt. And leaving it in FSMOne US Auto-Sweep account is not a bad alternative, for the moment.
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Hi, I have RMG for a long time and have bought and sold over different occasions. Currently, still in the red if everything is included (realized, unrealized, dividend)
Yup, read the notes on insurance. Am wondering if expenses will stay at this level going forward.
Hi, Thanks for the reply. Yep, looks like RMG will be going flatish for a while until the next QR results.. I do sense folks are bearish on the news for them and i took a different view.. Surprising , the price you sold is the price i bought. Oh well.. It is always a zero sum game in stock market.
From what i know (and still learning), the new insurance accounting standard means that their financial reporting is aligned to the concept of booking in their collected premiums less “expected actuarial cost” as opposed to booking in premiums and claims only when they happened.
If there are “no” changes in their risk profile, ie loss ratios the same, conceptually, this new accounting treatement will have less lumpy reporting compared to previous standard ie (ie boom when premiums are collected, burst when claims are made). My take is that RMG did not have a “change” in their risk profile for their underlying business, but this is more an accounting change in this year as they have to book in the forecasted “expenses” as well hence the jump. If it was more a claim related, then they will usually disclose eg is there a major claim or provision that requires that to book a higher insurance expense. They did not mention such scenario in the note . I do feel that they should have done a better job to explain this change especially since there is large %tage change. This is my guess and i may be wrong as well.
Good work on the analysis. Not many folks blog about RMG so i do like to read what is written since i am now vested.
Thanks for your sharing. I am alright with the new accounting method. So this year will be transition. But would need to think about how things will be like going forward.
The driver will still be the China hospitals, but do not know how much longer they will take to breakeven. The good news is that they are generating good cashflow.
My average price for current holding is around 1.05, so the realised loss is not significant.
Hi,
For RMG – did you break even ? Or was it loss making ? Cos it seems like the price has come off to rather new low ..
Also, just to follow up, you read RMG notes on insurance contract and the new FRS right ? It was part of the announcement.