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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 3 Apr 2020, 3:08 PM

 

Asian Healthcare Specialists - New Acquisition to Double Annual Earnings

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  • Asian Healthcare Specialists Limited (SGX:1J3) was established in 2013 as an experienced group of orthopaedic specialists who provide a wide spectrum of general and subspecialised orthopaedic, trauma and sports services such as knee/hip replacements, sports medicine/surgery, spine surgery, foot/ankle surgery and minimally invasive orthopaedic procedures.
  • Growing from just three orthopaedic medical specialists in 2013, the group added one orthopaedic specialist in each of 2015 and 2017, to list on the Catalist Board of the Singapore Exchange with five orthopaedic specialists in April 2018.
  • Post listing, Asian Healthcare Specialists started to expand into adjacent specialties/medical practices. In November 2018, the group set up a physiotherapy practice to complement its core business activities and hired a physiotherapist with more than ten years of experience (from being a junior therapist).
  • At the end of November 2018, the group also completed the acquisition of an anaesthetic practice and brought on board a specialist anaesthesiologist with approximately two decades of general and specialist experience.
  • In January 2019, Asian Healthcare Specialists further added one more orthopaedic specialist to its team, bringing the overall number of medical practitioners to 8 as at the end of FY19 ended 30 September 2019.

Creating a Larger Multi-disciplinary Group

  • Asian Healthcare Specialists announced yesterday that it has completed the acquisition of 51% of Cornerstone Asia Health Pte. Ltd. for S$32.1m. The acquisition of Cornerstone Asia Health adds five specialties and six doctors to Asian Healthcare Specialists team of eight medical practitioners. (see Asian Healthcare Specialists Announcements)
  • This acquisition is not only earnings accretive but will also create a larger platform for the recruitment of new specialists and doctors to join the enlarged group, thus expanding the group trajectory of Asian Healthcare Specialists.

Pro-forma Profit Attributable to Shareholders to Double

  • The acquisition is expected to add S$2.47m of recurring earnings to Asian Healthcare Specialists profit base. The latter made S$2.87m of net profit attributable to shareholders in FY19. We expect FY20F net profit attributable to shareholders of S$4.24m (48% growth from FY19F) and earnings per share growth of 22% from 0.9 cent to 1.1 cent as Cornerstone Asia Health will only contribute seven months of performance in FY20F.
  • Cornerstone Asia Health is more profitable than Asian Healthcare Specialists probably due to listing and other corporate costs that are born by the latter. The acquisition shows effective leverage of its listing to grow and expand.

Strong Cash Flows and Balance Sheet Support High Dividend Pay-out

  • Asian Healthcare Specialists net operating cash flows of S$2.6m against net profit of S$2.9m. We also like the Company for its strong cash generating ability and balance sheet. As at 30 September 2019, the group had net cash of S$12.4m, which can be further used to make new acquisitions.
  • Asian Healthcare Specialists has been generous in maintaining a high dividend pay-out.

Key Risks

  • Key risks include
    1. the newer/employed doctors may take time to exit their developmental period and deliver profit,
    2. some of the “acquired” doctors are already highly experienced and are at the peak of their careers.
  • The true test of the Asian Healthcare Specialists platform will be how the Company mentors newer doctors such that profitability is maintained even as the older doctors eventually retire.

High Growth Supports Fair Value of S$0.305

  • Using the dividend growth model and factoring the conversion of an outstanding S$5m convertible bond, we value the group at S$0.305 per share or at S$131.09m – at 14.5x FY22F earnings.
  • We believe that Asian Healthcare Specialists’ financial growth visibility following the acquisition of Cornerstone Asia Health justifies the high P/E multiple implied by our valuation and rate the Company Overweight.

Source: Tayrona Financial Research - 20 Feb 2020

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