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SingMedical Stock Review: Still Undervalued

Singapore Medical Group (SGX: 5OT) is an organisation that has a network of 35 clinics located around Singapore which provides private specialized health services. Besides local presence, they do have overseas clinics in Malaysia, Indonesia, Vietnam and Australia.

Recently, SingMedical released their annual report 2019 so I thought it is a good time to take a look and review their 2019 performance.

Before I continue, just want to point out that I'm currently long on this stock so everything I mentioned here is strictly my opinion and not to be taken as any form of investment advice. Please do your own due diligence.

Revenue, net income and free cash flow Y-O-Y

Data from MorningStar

The chart pretty much speaks for SingMedical's performance over the years. Revenue has been increasing at least for the past 5 years. The same applies for net income and free cash flow.

What is really interesting about this chart is that all 3 metrics have been trending down from 2010 up till 2013 before seeing a reversal in 2014. So what changed in 2013 that not only turned things around but also went on to achieve such great results?

I believe the largest contributing factor was the change in leadership where current CEO and Non-Executive Chairman joined during late 2013. Leveraging on their expertise, they formulated a plan to expand aggressively which has proven to be effective thus far.

Revenue Breakdown

Screenshot from SingMedical's 2019 annual report

Health services contributes the largest portion of revenue, followed by diagnostic and aesthetics and so on. As indicated in the annual report, management believes that demand for women and children's health is still there so they will be looking to expand further in these two areas.

Brief overview of balance sheet

Data from SingMedical's 2019 annual report

Not as great as the previous chart, current ratio is below 1 which means that SingMedical may have some difficulties paying all of its short term obligation.

The low current ratio might be the result of aggressive expansion. Just this year alone, SingMedical opened 4 new clinics in Singapore and acquired stakes in CityClinic Asia Investments Pte Ltd (CCAI). All of these are capital intensive.

As for their long term debt, debt to equity ratio is low which is lesser of a worry.

Outlook for medical care

As I was doing my homework on SingMedical, I came across this article by Budget Direct Insurance which talked about medical tourism in Singapore. Be surprised with some of the information they had put up.

According to the article, approximately half a million medical tourists visit Singapore each year and contributed almost a billion to the economy in 2014. Since then, no latest figures were provided by Singapore Tourism Board (STB). However, due to the fact that inflation rate for Singapore medical costs is 10%, medical tourists' visit has dwindled. Now I understand why elderly people often quote this:

可死 不可病

which translates to can afford to die but cannot afford to fall sick.

Why is the inflation rate so crazy high? Referring to Straits Times' article in 2018, experts deduced that it was attributed by insurance.

Anyway.. coming back to the topic, since it is getting pricier to see doctors in Singapore, medical tourists have gone to Malaysia or Thailand instead. STB might have noticed this trend, hence declared that they will no longer be prioritizing medical tourism in Singapore. Due to this shift by medical tourists and STB, SingMedical might further expand their overseas presence instead.

Now that no one is allowed to travel because of COVID-19, this may affect SingMedical's revenue in the short term as well.

Closing thoughts

Despite the company has been doing well over the past few years, its share price seemed to reflect the opposite. Why is that?

SingMedical 5 year chart from Yahoo Finance

Here are some of the reasons I came up:

  • Small market cap: Investing in small caps is deemed as risky. Investopedia has an article on this.

  • Low liquidity: Share price is subjected to manipulation which happened for SingMedical when Singapore had its first few cases of COVID-19. I first saw it happened to Riverstone, followed by other healthcare stocks which SingMedical was one of them.

  • Share dilution: SingMedical does issue convertible loans which gets converted into new shares. In turn, it reduces value for shareholders.

Data from Yahoo Finance
  • Undervalued stocks can remain undervalued for a very long time

Why did I invest in SingMedical and what are my plans?

It has been 11 years of bull market which is long due for a healthy reset. So, I had been taking a cautious approach with my investment picks, selecting businesses with products or services that would be required no matter how bad the economy becomes. One of which would be healthcare. However, what I didn't know was when shit hits the fan, people would just sell no matter what to preserve cash. Therefore, this is where I learned that share price doesn't necessary reflect the health of the healthcare business.

Currently, it is down about 20% from my buy price. I am tempted to average down but I think it is better to first see how the economy plays out. At the point of writing, coffee apparently cost more than a barrel of oil so we might see more bad news coming out. As I previously mentioned, undervalued stocks can be undervalued for a long time so no hurry to buy more.

For anyone to quickly figure out whether SingMedical is undervalued or not, here is a quick comparison with other healthcare stocks:

Data from Yahoo Finance and MorningStar

TalkMed is starting to look attractive as well.

My 2 cents.

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