11 July 2018

Singapore Medical Group (SMG) ($0.43)

Singapore Medical Group (SMG) ($0.43)

Our View
Markets have been volatile amidst the rising political tension and the official start of a trade war between China and US. Singapore being an export-driven country is likely to affect as well, with the STI currently down about 4.6% YTD, and 11% from its 52 week high. Nonetheless, it serves well for an investor with a long-term investment horizon to remain focus and pick up quality stocks when the opportunity arises.

We like SMG as:
·         its earnings are the more domestic focus and less likely affected in a trade war (although there is likely still indirect impact, should a trade war result in a recession and possibly less demand for private healthcare vs public).
·         However, over the long term, there is still a rising demand for quality healthcare in the region amidst an ageing population.
·         Share price has taken a beating of more than 40% from its highs, amidst market jitteries, medical sector currently not in play etc- such that the stock is now one of the cheapest among its local healthcare peers, and at just 14.3x FY19F PE (which is at a significant discount to historical medical sector range of about 18-28x PE.
·          It is very clear that management thinks there is value in the company and is keen to enhance shareholder return as evident from their subscription to the latest rights issue (11% premium to current share price) and exploring avenues such as share buybacks and dividends.
·         Company is still growing as shown in its latest 1Q18 results which saw new profit surged 139% YOY (FY18F EPS forecasted to grow 38% YOY , followed by 8-9% growth p.a. over next 2 years).

Nonetheless share price action continues to remain weak despite its attractive valuations. Will recommend this for long term investors with at least a 3-5 years horizon, and accumulate using a dollar cost averaging strategy (given the current weak share price action)
SMG is a private healthcare provider based in Singapore, with 35 clinics. It is led by a group of reputable management (who successfully turned the company around from a loss in FY13 to a profit of S$8.5m in FY17) armed with an ambition for regional expansion- SMG has invested in JVs in overseas markets such as Australia, Jakarta and Vietnam.

Key business:
  1.   Healthcare: Oncology, Obstretrics & Gynaecology (O&G), Paediatrics
  2. Diagnostics & Aesthetics

Investment merits
An aging population – bodes well for rising healthcare needs in the region.

The cheapest among its local healthcare peers. Trading at 15.4x FY18F PE, 14.3x FY19F PE (EPS forecasted to grow at 8-9% p.a. for next 2 years) according to Bloomberg. This vs its local healthcare peers who are trading at 15.5x-32.3x FY19F PE. It is trading at an 8% discount to its closest competitor Singapore O&G and at the widest discount to Raffles Medical since 2016 at 14.8x blended forward 12M PE vs Raffles Medical’s 29.1x (according to Bloomberg).

Major shareholders and management show confidence in the group by taking up the recent rights issue at S$0.48/share (11% premium to current share price). While share price has went below the recent share price placement, management and Cha healthcare has went ahead to subscribe to their share of the rights, showcasing their confidence in the group’s future and expansion plans. 

SMG continues to deliver. 1Q18 Revenue (+37% yoy), Gross Profit (+47% yoy), NPAT (+139% yoy) on the back of increased revenue from both Health business segment and Diagnostics & Aesthetics business segment. Overseas operations are also starting to see improvement, as share of loss of JV and associates decreased 75% to a net loss of S$12k for 1Q18 on improvement in PT Ciputra SMG and share of profits from CHA SMG Australia Pte Ltd, offset by losses in SMG International Vietnam (where investment was made only in Jan 17, and is still in ramping up phase)

Growth set to continue- SMG opened its new 5,500 sqft center at Novena Medical center in Feb 18, and expected to add an additional radiologist and visiting consultant radiologist in cardiac and paediatrics to business in 3Q18. In Apr 18, completed acquisition of majority stake in Pheniks, operator of aesthetics and plastic surgery clinic, SW1, which will help contribute to profit and hopefully drive cross selling opportunities for SMG’s women’s health segment.
  • ·   In its latest corporate business update, the group stressed its strategy to continue its “buy and grow” strategy – which is buying  profitable business and growing it organically (as with its Astra acquisition where SMG has opened 2 new O&G clinics since) 
  • Strong growth potential overseas. For Eg. Vietnam’s healthcare market is an underserved market with number of physicians to population ratio at 0.8 per 1,000 below the OECD average of 3.3 per 1,000. SMG having identified the opportunity early, has grown its Vietnam presence to over 60 multidiscipline specialists and a team of 6 paediatricians

Improving shareholder return. While there are no firm plans announced, Management has highlighted that it is exploring avenues to enhance shareholder return including setting a formal dividend policy and share buybacks.