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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 15 Aug 2019, 4:26 PM

 

Singapore Medical Group - 1H19 Profit in Line; Reiterate BUY

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  • Maintain BUY with unchanged DCF-derived Target Price of SGD0.48, 30% upside.
  • SINGAPORE MEDICAL GROUP LTD (SGX:5OT)'s 1H19 revenue of SGD44.6m (+9.4% y-o-y) was mainly contributed by the acquisition of Pheniks in Apr 2018. 2Q19 PATMI was at SGD3.5m (+3.5% y-o-y), bringing 1H19 PATMI to SGD6.8m (-1.1% y-o-y), accounting for 54% of our forecasts. We believe the positive momentum will likely sustain.
  • The stock is trading at 14x P/E vs peers’ 20x, offering an attractive upside potential.

Higher Gross Profit on Steady Gross Margins

  • Singapore Medical Group's Gross profit increased by 10.4% and 11.3% in 2Q19 and 1H19 to SGD10.7m and SGD20.7m, due to stronger contributions from the higher-margin Diagnostic & Aesthetics segment. Gross margin remained unchanged y-o-y at 46% in 1H19.
  • We expect gross margin to be slightly compressed in 2H19 with the addition of new headcount.

Following Through Its Expansion Plan

  • Singapore Medical Group will likely add a new gynaecologist, two new paediatricians, and a radiologist in 2H19. We understand that management intends to bring on board 10-12 specialists during the current financial year to grow its key specialist verticals (obstetrics, and gynaecology & paediatrics).
  • With an untapped cash position of SGD9.7m from the full drawdown of its convertible loan, we believe the group is well-positioned for overseas expansion into possible new markets such as Cambodia, Thailand and Malaysia, while further strengthening its footprint in Vietnam.

Conversion of Convertible Loan and Proposed Acquisition of Additional Shares in CityClinic Asia (CCAI) to Capture Opportunities in Vietnam

  • Singapore Medical Group has exercised its option to convert the convertible loan of USD0.69m to 177,670 ordinary shares, at the conversion price of USD3.88 apiece, and will acquire an additional 65,647 shares for USD0.26m from existing shareholders at the same price. Singapore Medical Group will hold an effective 24.4% in CCAI once the two transactions are completed.
  • CityClinic Asia (CCAI) reported a net loss before tax of USD1.13m for FY18, and is likely to continue incurring losses in FY19F although we do not expect the losses to have a material impact on Singapore Medical Group. We believe it will take some time for the business to turn profitable.

Reiterate BUY

  • Reiterate BUY with unchanged DCF-based Target Price of SGD0.48.
  • The stock is trading at 14x P/E vs peers’ 20x. We believe the steep discount compared to its peers offers a good opportunity to buy in.
  • On a fundamental perspective, we believe Singapore Medical Group still has the potential to grow through the addition of clinics/specialists and/or stepping up its partnership with its largest shareholder, CHA Healthcare, to explore projects in the region.

Source: RHB Invest Research - 8 Aug 2019

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