Hi Fifth Person,
Hope you guys are doing well!
I was looking at medical companies listed in Singapore, like Raffles Medical, IHH, Talkmed. I realized that even though they passed the Financial, Management and Business Quadrant. A lot of them are over-valued!
Take for example Raffles Medical.
Financial – Company has steady rising revenues, profits, OCF has been rising. Raffles has been rising their dividends as well.
Business – Healthcare business is defensive in nature ie. People still need medical services regardless of market conditions. Company has also got plans to expand into China thru a JV. Raffles is also currently expanding their hospital in Bugis by building a new wing.
Valuation: The PE ratio now is 40x, which is really high. Based on DCF, discount rate of 5%, 10% growth, calculated IV is $2.00. Did a bit of backtest for the past 3 years and realized that Raffles has been constantly over-valued.
How do we value such companies?
In general healthcare stocks are considered cheap when pe hits 20x and below? In this case what is the pe be considered overvalued?
It depend on the predictability of the business, some healthcare company are not predictable which is why they trade below 20. It is good find out the average traded PE of the company and buy below it
Are we able to determine the predictability based on annual report, or we have to base on qualitative analysis?
You can to look at the financial statement and see whether they profit is consistent