01-09-2014, 10:54 AM
Health Management International is a small cap medical company operating in Singapore and Malaysia. It has 2 core business - owning and operating 2 Hospitals in Malaysia and running a nurse training institute in Singapore. It recently announced its FY result - http://infopub.sgx.com/FileOpen/June_201...eID=312850 Results are excellent and the growth momentum continues from 1H 14.
I initiated my position in HMI back in June and steadily added some as the weeks went by. Unfortunately, the strong rally thereafter caught me off guard so I couldn’t fully complete my accumulation. I found the Company interesting then due to the sharp growth in profits in recent years and the under-valuation then with 1H 14 annualized PE < 20 (no longer an issue).
Key Summary:
1) It owns a 49% stake in a matured and profitable Mahkota Hospital generating the lion share of the Group’s profit. It also owns 61% stake in a greenfield Regency Hospital in Johor built in 2009 and registered its first profitable year in 2014. The nursing business has historically been loss making though it registered positive EBIT this year. All 3 business are consolidated at Group level resulting in substantial minority interests.
2) The Group was weighed down by losses from Regency which only broken even in FY 2014. While this wiped out the bulk of the profit from Mahkota initially, the incremental revenue and rapidly narrowing losses can be seen from key ratios like EBIT and EBITDA margins. Hospitals, like many infrastructures, requires a certain number of patients to reach breakeven point and thereafter, with bulk of the cost being fixed, results in incremental profit and margin expansions. This weighed down the Group results till 2012 as the losses from Regency were substantial. From 2013 onwards, Regency broke even in EBITDA terms and this ended the financial black hole.
Group EBIT Margin
2010: 3%
2011: 4%
2012: 7%
2013: 11%
2014: 14% (Regency turned profitable)
3) The Group has a complicating structure with substantial minority interests and associates. There are loans to associates and interest income paid from it. It took me a few days to piece it all together and even then, I still find it confusing. I attribute this to the bumiputera policy restricting foreign ownership ?
4) The Company does not pay a dividend. There is risk of cash being 'stuck' at the operating assets where it does not have a controlling stake albeit it does have managerial control.
5) Gearing levels are low with debt being repaid annually. Bulk of the capex ie Regency development was financed by bank loans and rights issues in the past.
5) The controlling shareholder raised her stake from 39% to 51% via a partial general offer at 16 cents last year. She increased her stake this year with a married deal at 18.0 cents. Judging by the recent results and improving operational outlook, it does seem to be a great deal.
6) With the recent rally, valuation has improved tremendously reaching PE of 29. So the question is whether can the growth in the hospital division be maintained in light of growing competition ?
7) Ultimately a small company operating in a foreign country. The risks are substantial.
I suspect a few buddies do own this company. Personally, I view this as a rapidly growing small cap in the medical sector. It is fairly speculative nonetheless and I won't deem it to be safe or defensive like Raffles Medical. This is in no way a research piece. Would appreciate your views.
(Vested)
I initiated my position in HMI back in June and steadily added some as the weeks went by. Unfortunately, the strong rally thereafter caught me off guard so I couldn’t fully complete my accumulation. I found the Company interesting then due to the sharp growth in profits in recent years and the under-valuation then with 1H 14 annualized PE < 20 (no longer an issue).
Key Summary:
1) It owns a 49% stake in a matured and profitable Mahkota Hospital generating the lion share of the Group’s profit. It also owns 61% stake in a greenfield Regency Hospital in Johor built in 2009 and registered its first profitable year in 2014. The nursing business has historically been loss making though it registered positive EBIT this year. All 3 business are consolidated at Group level resulting in substantial minority interests.
2) The Group was weighed down by losses from Regency which only broken even in FY 2014. While this wiped out the bulk of the profit from Mahkota initially, the incremental revenue and rapidly narrowing losses can be seen from key ratios like EBIT and EBITDA margins. Hospitals, like many infrastructures, requires a certain number of patients to reach breakeven point and thereafter, with bulk of the cost being fixed, results in incremental profit and margin expansions. This weighed down the Group results till 2012 as the losses from Regency were substantial. From 2013 onwards, Regency broke even in EBITDA terms and this ended the financial black hole.
Group EBIT Margin
2010: 3%
2011: 4%
2012: 7%
2013: 11%
2014: 14% (Regency turned profitable)
3) The Group has a complicating structure with substantial minority interests and associates. There are loans to associates and interest income paid from it. It took me a few days to piece it all together and even then, I still find it confusing. I attribute this to the bumiputera policy restricting foreign ownership ?
4) The Company does not pay a dividend. There is risk of cash being 'stuck' at the operating assets where it does not have a controlling stake albeit it does have managerial control.
5) Gearing levels are low with debt being repaid annually. Bulk of the capex ie Regency development was financed by bank loans and rights issues in the past.
5) The controlling shareholder raised her stake from 39% to 51% via a partial general offer at 16 cents last year. She increased her stake this year with a married deal at 18.0 cents. Judging by the recent results and improving operational outlook, it does seem to be a great deal.
6) With the recent rally, valuation has improved tremendously reaching PE of 29. So the question is whether can the growth in the hospital division be maintained in light of growing competition ?
7) Ultimately a small company operating in a foreign country. The risks are substantial.
I suspect a few buddies do own this company. Personally, I view this as a rapidly growing small cap in the medical sector. It is fairly speculative nonetheless and I won't deem it to be safe or defensive like Raffles Medical. This is in no way a research piece. Would appreciate your views.
(Vested)
