World Health Day is celebrated annually with a specific health theme highlighted by the World Health Organization (WHO). The principle behind this initiative by WHO is to raise awareness about the overall health and well-being of people across the world. The theme this year is to keep our planet and humans healthy, and foster a society focused on well-being.
So, can investors find stocks in Singapore that contribute to our well-being? The answer is yes. And as most of us are probably already using these companies’ services and products, why not consider investing in them?
We put the spotlight on two of them, both of whom are household names: Great Eastern Holdings and Haw Par Corporation.
Great Eastern Holdings
Great Eastern provides insurance services in three segments: Life insurance, non-life insurance and shareholders. The life insurance segment includes life insurance, long-term health and accident insurance, annuity, and investment-linked policies. The non-life insurance segment includes short-term property and casualty insurance, and short term medical and personal accident insurance. The shareholder segment provides fund management services.
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If you have any insurance from this company, you are contributing to their business revenue and should look at how they are doing if you want to invest in them.
Great Eastern’s financial data
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To start, let’s look at the top line of the company. In other words, the revenue Great Eastern is bringing in. Great Eastern’s revenue has been increasing over time. This is good news for shareholders as the business earns more revenue each year. But what about the bottom line?
According to data retrieved from POEMS 2.0. Stock analytics, earnings per share have been steady, ranging from $1.50 to about $2.50 per share for the past five years.
That is great news, because as an investor you want to be in a business that earns profits consistently. It is difficult to predict who will make a claim on their insurance, so Great Eastern’s ability to have a steady EPS speaks volumes.
Great Eastern also shares its profits with shareholders through dividends. And consistent dividends tell us that the management is confident of achieving such earnings in the long run. The company’s positive free cash flow gives us the assurance that the company is not paying dividends out of debt but out of what it has.
Combined ratio
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Combined ratio is used to assess the profitability of insurance companies and can be used to look at how Great Eastern fares.
A ratio of less than 100% is good as it shows that the company is earning more than its expenses.
To be conservative, I have included total expenses and the combined ratio is still below 100% which is good.
The price is right?
If you choose to invest in Great Eastern, you may want to consider the price you enter at.
Ultimately, the price is what you pay and you want a margin of safety. And who would say no to paying 50 cents to buy a dollar bill?
Judging from the increasing sales that Great Eastern is enjoying, the price-to-sales ratio is telling us that this stock is currently undervalued. So decide accordingly.
Considerations
Liquidity
The business looks good. However, the share volume seems a bit on the low side with an average traded volume of just over 100,000 a week. Do note that this share is not for trading but for investors with a long-term perspective.
Going forward
Is it a good business? I would say that as a business owner you want your business to be earning consistently.
Is there more room for growth? I believe so, as they are already operating in Singapore, Malaysia and other parts of Asia. And they can grow the business if the company continues to expand. According to a recent press release, we know that Great Eastern is strengthening its distribution network, core channels of agency/financial adviser representatives and selling products through banks using digital tools.
Also, besides digitising its business and strengthening what it already has, Great Eastern continues recruiting financial adviser representatives across the region.
Haw Par Corp
Have you heard of Tiger balm? If you are a Singaporean, chances are you know about it, and may even be a user of this product. Haw Par Corporation is in the business of healthcare products and Tiger balm is one of them.
The company has four business segments: Manufacturing, marketing and trading of healthcare products; investments in securities; property rental and provision of leisure-related goods and services. Let’s now look at some numbers to see how Haw Par is doing.
Haw Par’s financial data
The revenue refers to sales from healthcare and its leisure and property business, and does not include investment in securities.
Haw Par’s revenue was affected by weak consumer spending due to the Covid-19 pandemic and we can tell that from the drop in revenue. But thanks to its investments in the securities business, earnings per share (diluted) were still comparable to FY2017 despite the drop in revenue.
The dividend per share has been steady, giving shareholders a share of the profits, and this tells us that the management is willing to share its profits. The cash flow is still positive but falling. However, the dividends are not paid out of debt.
The price is right?
On a price-to-sales basis, I would say Haw Par is slightly on the higher side. But do note that we are looking at each company’s historical price-to sales ratio to gauge if the company is considered over or undervalued. Great Eastern and Haw Par are two stocks in the healthcare sector, but doing different business. Hence, it is important to understand the context before we conclude that one is cheaper than the other.
Considerations
Free cash flow
If its free cash flow is trending down, that could be a cause for concern. So, can the investment segment continue to do well to make up for its healthcare business? This is hard to say.
Overpriced
Despite the falling revenue, the prices continue to remain high. So, from a long-term investor’s point of view, a good move would be to wait.
Going forward
With its global network in 100 countries, the company is in a strategic position to expand business operations. Haw Par’s leisure and property business is still a small contributor to its revenue. So, this could mean it has potential to grow further, especially after the Covid-19 situation improves. But this could probably take some time.
Conclusion
Healthcare is definitely a business that is evergreen. Health is wealth and we do not lack buyers who demand some form of treatment and protection. As investors, however, we want to focus on getting in at a good price in a good business. As Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Using the price-to-sales ratio is a reasonable way to assess what is considered to be a good price. But most importantly, manage your risks, buy good businesses — and you will do fine.
Chua Minghan and Jeremy Chua are both CFD dealers at Phillip Securities
