Monday, August 27, 2007

Health Management International (HMI) - Sampan in a Rising Tide

Health Management International (HMI) – Sampan in a Rising Tide

Health Management International is a Malaysian healthcare player listed on the Singapore stock exchange.

According to a recent press release by the company following its latest full year results, the company has displayed stellar results. The stock price of the company has soared in recent months, and investors ostensibly are very enthusiastic about the stock. This research note takes a skeptical view of HMI and questions the prudence of making or maintaining an investment in the company.

Raffles Medical Parkway HMI
Revenues $134,248 $221,611 $43,576
Operating Profit (Persistent)

Net Profit (Persistent)

Earnings Estimate $19,200 $53,712 $7,371
Total Assets $224,569 $1,301,535 $90,547
Total Liabilities $55,416 $842,174 $30,850
Equity $169,153 $459,361 $59,697
Liab/Assets 24.68% 64.71% 34.07%
ROE 11.35% 11.69% 12.35%
ROA 8.55% 4.13% 8.14%
Operating Margin 15.72% 18.79% 20.48%
Net Margin(Persistent) 13.11% 12.12% 11.13%
CFO/PBT 0.463 1.139 -1.276
Earnings Growth y-o-y 43% 19.58% 90%
Shares Outstanding ('000) 463119 770043 ???
EPS Estimate $0.04 $0.07 $0.02
NAV $0.37 $0.60 $0.08
Stock Price $1.46 $4.08 $0.22
P/E 35.22 58.49 10.48
P/B 4.00 6.84 2.62

The table above shows key ratios of HMI and comparable companies in the healthcare sector that are listed on the Singapore Exchange. Profit numbers have been adjusted for non-recurring items.

Unimpressive Competitive Position

The first thing we notice is that HMI is a much smaller company than its comparables. It is only a fraction of the size of the biggest of the three stocks listed above, Parkway. This is not surprising considering that HMI has actually undergone much operating difficulty since its listing. It has closed down some of its original businesses because they were unsuccessful and has tried to enter into other businesses such as running a nurse training school, which is a business with poor competitive moats.

Based on the history of the company, it is difficult to say with any degree of confidence that the HMI management team is capable of slugging it out amongst the big players. Furthermore, it has no entrenched competitive position vis-à-vis the big names and there is no certainty that when operating conditions move against it that it will not return to its history of (un)profitability.

Poor Accounting Quality

Another thing that strikes the analyst is that there is a rather poor quality of accounting lining the company’s financial statements and that management makes no effort to make navigating the numbers easy for investors. In fact, the press releases are downright misleading as to the actual operating conditions of the company.

For instance, a large one-time gain of $3.3m (FY07) derived from an equity interest in Regency Medical Centre is listed above the operating profit line, as if to say this is a recurring item. This is clearly a non-persistent item that should be classified as such on the profit statement but yet is not. Adjusting the statements for this item gives the statements a much less flattering view of the company, than the HMI press release that proclaims a jump in net profit by 90%.

A second point of suspicion is that regarding minority interest. The amount of profit due to minority interests seems to wax and wane without rhyme or reason. Even though this year’s net profit has jumped by 90%, the minority interest paid out is less than the previous year. Yet there is nothing available in the notes to the statements to give the investor an idea of how minority interests are derived.

Thirdly, when comparing the 06-07 HY statements with the 05-06 HY statements, you will realise that there are material differences between the unaudited interim statements and the final audited numbers. When the restated numbers are different from initially reported, it makes me wonder whether I can trust the unaudited half year statements as reported by the company.

Fourthly, some simple reporting conventions are not met. The liabilities are not grouped together and subtotaled separately from shareholders' equity and minority interest. Even the number of outstanding shares is nowhere to be found in the financial statements.

Overall the financial report appears to have been sloppily put together, and one suspects that this is symptomatic of how the company is run as a whole.

Appalling Cash flows

As can be calculated, the CFO/PBT ratio is a negative 1.276, compared to the much better ratios of each peers. I cannot find explanation by management of why there has been such a great jump in current liabilities resulting in the poor operating cash flow numbers.

Sampan in a Rising Tide

As Warren Buffett has famously proclaimed, a rising tide lifts all boats. Health Management International appears to be a sampan which has had its operating and stock performance lifted by the favourable economic conditions and by the rising equity markets as a whole, not because of management’s prowess or prudence.

Punters and gamblers who wish to stay for the risky ride may choose to bet on this stock. However, once the tide goes out, it is likely that HMI will crash into the rocks and its stock price will plummet. Conservative investors will do well to avoid this company, or sell the stock ($0.22-25 is a reasonable price) while the market affords them the opportunity to do so.

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