Raffles Medical Group

Raffles Medical (SGX:BSL), is perhaps one of the most well known and largest private medical companies in Singapore. Its brand is synonymous with Raffles Hospital situated in Bugis as well as the Raffles Clinics. In the medical line, reputation of the hospital is vital and acts as a natural moat. Raffles Medical has does such by establishing its brand name in the private medical market.

It currently operates its medical business primarily in 2 countries - Singapore and China. As part of its expansion in Singapore, RM recently opened a new center in Holland Village in 2016 and a new wing for specialist center at its Bugis Hospital. It too has business in other SEA countries

Valuation

Based on full year results, Raffles has a reported earnings per share of 4 cents and a dividend of 2.25 cents. From a current price of $1.13 (as of 5 Oct 2018), it points to a 28x PE and a fairly low dividend yield of 2%.

However, it is worth noting Raffles Medical is very very conservative. Its dividends is sustainable with the company capping it at below 75% of its payout ratios, unlike Singapore Telecos who pays higher than 75%.

Figure 1: Raffles Medical Past 5 year results (Source: Annual Report)

From a cash flow analysis, Raffles Medical has always been paying its dividends out of free cash flow generated by its businesses.

Future growth - Singapore

Raffles Medical has completed refurbishing its flagship hospital in Singapore with a specialist center. This will increase the Bugis Hospital capacity. With MOH making it more expensive for foreigners to be referred to public hospitals and given Raffles Hospital Branding, the increase in its hospital capacity should be filled.

Secondly, Raffles Medical too has been granted the license to be an integrated Healthshield provider in Singapore. RM can definitely reap synergy between its insurance business and brick and mortar health business.

Future Growth- China

Raffles Medical has imported its reputable brand name from Singapore to China as well and has been gaining traction. It currently operates various medical centers in China cities. Raffles Medical will have two new Raffles hospitals in 2 Chinese cities in late 2018 and 2019.

All in all, one can reasonably expect Raffles Medical to experience earnings growth from this year until 2020. It seems a decent stock to own that will provide a sustainable dividend under its current management. Personally, I expect its earnings to grow by 20% by 2020 and this may also mean future dividends of 2.75-3 cents per share. And can be sustained perpetually until its reputation is adversely affected

Based on the above growth prospects, I expect an additional 25% growth in earnings in 2020. This probably means RM is priced at 20x its future earnings growth; just about right at current price.

Management

Its reassuring to learn that its Executive Chairman (Dr. Loo Choon Yong) who runs its business is a doctor by training. IWith the key management being professionals in the same field, it is likely to know the running of the ground.

Its management has also been very conservative in building up the business. RM has constantly kept its leverage ratio low, currently at 10%; and pays its dividends in a sustainable manner. I feel this makes the company a good choice as a dividend stock; even better than telecos who are highly leveraged, paying a high payout ratio and beyond their free cash flow.

The only thing dividend investors have to stomach its low dividend yield and conservative management. This comes from the careful and conservative nature of doctors...

Review of Silverlake Axis

In recent times, Silverlake Axis's share price has fallen from its 50-60 cents range to that of 41.5 cents as of today. The question on people's mind is probably, if the current share price reflects the value of the company. As a start, let's recap on the business of Silverlake.

Brief description of Silverlake Axis

Silverlake Axis's main competency lies in the core banking system industry and insurance. It produces software which is used to run the operations of financial institution. As the core banking system is a critical system for the bank, there is a high risk and high cost nature involved if banks switch from one core banking system product to another. Hence, this is where Silverlake's business moat lies- It is difficult for its customers to switch out. 

Silverlake adopts a business model where it sells the software to financial institutions and then charges a recurring annual maintenance fee as a vendor. This model is similar to Sarine Technologies. 

Given its business model, Silverlake has been able to generate a consistent EPS and cash flow making it easy to estimate the value of the company because it is least affected by economic cycles.

Business Fundamentals

So let's now look at its Balance Sheet and cash flow. Its latest Financial results can be found here.

In the previous financial year, Silverlake had an abnormally high profit because it did a one time sale of its China stake. Otherwise, its earning per shares will be only 5 Malaysian cents (or about 1.6 SG cents). This means at at current prices, SIlverlake is priced at about 14x P/E.

On the cash flow front, the company is generating about 160 Million in Ringgit after accounting for investments into its software development. It means Sivlerlake is able to support about 6 Malaysian cents or 2 SG cents Dividends. Silverlake too still has about 300 Million Ringgit in cash. Most of the stated cash are in deposits in China because of China's restriction of capital movement; silver lake has to slowly transfer the cash out of china.

Valuation

Given that Silverlake's business model is fairly consistent and resilient, we can estimate that shareholders will get 2 SG cents of dividends annually. This will be further supported by its strong cash reserves which it is trying to take out from China.

In my opinion, Silverlake can be valued as a dividend stock which will give shareholders an annual dividend of 2 SG cents. At a price of 41.5 cents, the company is at a 4.8% yield. In my opinion, Silverlake is fairly priced and investors may consider the company whenever its share price places it in the 5% yield. 

Is Ezion Turnaround in Sight?

Ezion Holdings is in the business of chartering out its liftboats, service rigs and barges etc. The company recently underwent a financial restructuring to save itself. It led to a massive dilution of old shareholders who are unlikely to recover their cost price.

What went Wrong and its Financial Restructuring

Ezion's management made the big mistake during the oil boom days to borrow money extensively to buy oil support equipment thinking that chartering rates will continue to be that high. In 2015, oil prices went down and Ezion's equipment were chartering at much lower rates and the company was unable to service its massive debts.

The company underwent a financial restructuring in 2017 where i) Banks agreed to lend them money at a lower interest rate but received a large number of shares as part of the agreement, ii) Most bondholders and perpetual bonds agreed to convert their bonds into shares; likely selling it off thereafter and losing a large part of their capital. It resulted in a dilution of shares where Ezion's share capital increased from 2 Billion shares to 3.7 Billion Shares

Turning Around of Ezion

In Q2FY2018, Ezion posted a terrible set of financial results:

Ezion's business is still in terrible shape with a quarterly gross loss of $10.9 Million before other expenses. If we were to factor in other expenses and ignoring its one off fair value  and exchange rate gain due to the strengthening US Dollar (recorded as other Income); Ezion is likely to have made a loss $30 Million Losses in the past 3 months.

So how can Ezion Turnaround about $30 Million in Quarterly Loss?

Firstly, Ezion has secured and refinanced its $1+ billion debts on 2 July 2018. This is likely to reduce its quarterly finance expense from $7.8 Million to about $2.0 Million in expense. The arrangement will allow Ezion to enjoy low interest financing until June 2024.

Secondly, many of its lift boats are still idle despite the upturn of the oil industry. According to a DBS brokerage report on Ezion, it is expected 2 more lift boat will be chartered out this quarter at a rate of USD 30+k per day. The chartering of these 2 Lift boats is likely to raise Ezion's revenue by about US$6 million. 2 more lift boats will also be chartered out in Q4 FY2018.

With the increase in lift boats utilization rates and lower finance expense, I am still expecting Ezion to report losses for the next few quarters. It is only during the next financial year would I expect to Ezion to break even.

Given the scenario described above, Ezion is likely to be worth slightly below its book value of US 12.17 cents (SGD 16.6 cents). Ezion's fair value is likely only SGD 15 cents.

What Happens in 2024?

Another dark cloud is Ezion's ability to repay its debts in 2024. By 2024, Ezion will have to refinance its $1.2 Billion of Low Interest Bank debts and $170 Million of Bonds. Given that at a charter rate of $40k USD per day for its 13 liftboats, Ezion is likely to only earn USD$190 Million in annual revenue. It shows that Ezion is likely to have a cash shortfall in 2024 of about $200 Million.

However, I personally doubt it will be a big issue if (i) oil markets don not deteriorate from then and (ii) ezion's management do not foolishly indulge in huge capital expenditure. What I would like to see is that the management does their job of running daily operations carefully, not to dream big of massive expansion again and pay themselves high salary which amounts to a few million like during those boom times.

Past Shareholders and Bondholders have already made the financial sacrifice and trust that the management will turn things around. It will be incorrigible for Ezion's management to again betray this trust and second chance offered to them. Will Ezion's management be sincere enough to correct their mistake or decide to take advantage of peoples' trust? Who knows.

<Invested in Ezion Holdings>

Is There Something Wrong with Singapore's Accounting Practices?

With the recent spate of SGX companies taking huge write down of assets and frauds still happening as frequently, it got me wondering- Does Singapore have a weak financial regulator or is it there something wrong with our accounting practises?

Case 1- Noble Write Down

Many of us will be aware of Noble's huge write down on its financial derivatives and the subsequent loss in shareholder value.  All these while, an independent research house, Iceberg, has been indicating that Noble had over-valued its financial derivative assets. What made it worse was that Noble's own external auditor, Ernest & Young, had for years been giving Noble the clean bill of health. While it is true the methodology is sound, the inputs/estimates Noble had given was unrealistic.

This begs the question: Are our auditors really looking at the authenticity of numbers by thinking on the inputs or are senior partners just blindly signing off? After all, many university students have learnt of the idiom - "Rubbish in, Rubbish Out"; hence I wonder if many of our practicing auditors do take heart of this idiom when doing their work. This brings me to the second case.

Case 2- Hyflux and Tuaspring.

This is another classic story of  "Rubbish in, Rubbish Out". Hyflux is now in financial limbo and at the heart of it is its largest asset- Tuaspring which is worth $1.4 billion in book value with a lifespan of 20 more years. How did Hyflux value $1.4 billion? Well Hyflux had based it by estimating the total economic value its power plant will bring based on 2011's electricity price of $200+ per unit and extrapolated it until the duration end of 2038.

Fast forward to its completion in 2015, prices hit its low points and in 2016 it went down to below $70+. One may argue that electricity prices will rise back to $200+ to match Hyflux's estimates, but common sense and Google searching would have showed that Singapore's power industry was oversupplied where power output supply was double that of demand. Even if the upward reversion is true, it will take time. Hyflux definitely could have taken an impairment n for the poor outlook that is happening now.

Unsurprising Hyflux's external auditor, KPMG, are still giving the OK for Hyflux's stated book value until FY2017. With the recent need to sell Tuaspring to rescue itself, I am pretty sure Hyflux will be booking an impairment on its own and not because KPMG has realized the inputs to Hyflux's valuation model does not hold true.

It makes me wonder if our auditors are indeed verifying the authenticity of the reported balance sheet numbers of our companies. In addition, with recent times, we have noticed how many companies with overseas operations have been found to report non-existent cash balances in their balance sheet. The most recent example was Midas Holding (External Auditor: Mazars)

It makes one wonder the robustness of our auditors in conducting their due diligence on overseas operations of listed companies here. In fact, if I am in to indulge in my clairvoyance ability, my crystal ball says a listed company starting with "S" is dodgy. The company's market capitalization is much lower than its stated net asset value and will easily pass any CNAV analysis value investing model; surprisingly no hedge fund or investment fund is invested in it!

Conflict of Interest

It is worth noting that under Singapore's current financial regime, companies themselves have to hire the auditors who will be checking on them. This is a potential conflict of interest because the current practices means Audit firms have to rely on these companies for their livelihood. Hence should audit firms give a bad report on their own customer (these listed companies), it is likely the auditors will lose their business.

In Pritam Singh's word, it iscalled "Ownself Check Ownself"

So naturally if an auditor feels that a certain company is giving dodgy inputs to makes its balance sheet look great; would auditors flag it out to warn the public knowing that they will lose a potential source of income? I think you and I know the answer. 

Instead we should consider asking companies to pay their audit fees to a central regulatory body who will then appoint an auditor on their own for a period of time (e.g. 5 years). Extra Financial Incentives can be given to auditors should they spot a fraud or dodgy practices done by their audited company; and if a fraud or massive impairment happens during their watch, they face a financial penalty.