Singapore Medical Group - Buy on Dips; Upgrade to BUY

Date: 07/06/2019

Source  :  RHB
Stock  :  SingMedical       Price Target  :  0.48      |      Price Call  :  BUY
        Last Price  :  0.31      |      Upside/Downside  :  +0.17 (54.84%)

  • Upgrade to BUY from Neutral, with unchanged DCF-based Target Price of SGD0.48, 26% upside.
  • Singapore Medical Group's share price has fallen by 15% to SGD0.38 from SGD0.445 since 10 May. The stock is currently trading at 14x P/E, a discount to its peer average of 23x P/E. We think that it is a good level to accumulate.

CHA Healthcare Paid An Average of SGD0.549 Per Singapore Medical Group Share

  • SINGAPORE MEDICAL GROUP LTD (SGX:5OT) first issued 30m shares via private placement to CHA Healthcare in Feb 2017 at SGD0.50/share, and subsequently, CHA subscribed to 3m rights shares at SGD0.48/share. In Feb 2019, CHA increased its stake to 24.13% (from 6.87%) by purchasing 83m shares from Singapore Medical Group’s existing shareholders (including management) at SGD0.605/share.
  • CHA is also providing a SGD10m convertible loan at a conversion price of SGD0.423/share. About 80% of the loan has been earmarked for M&A activities. If the bond is converted, CHA stands to own 27.69% stake in Singapore Medical Group.

Near Term Profitability Should be Impacted by Aggressive Growth Plan

  • In 1Q19, Singapore Medical Group opened the O&G and paediatrics clinic in Punggol, and its second aesthetic clinic SW1 in downtown Singapore. Singapore Medical Group also recently opened a breast care clinic last month.
  • Regionally, it has expanded SW1 into Vietnam, and it should take a new clinic 2-3 years to breakeven. Singapore Medical Group intends to on-board 10-12 specialists this year, and new specialists may take time to ramp up their practice to full capacity.

1-year Share Price Return of Over 20%

  • Singapore Medical Group's share price slipped 15% since 10 May with a 1-year return of -22.4%. The share price fell due to recent market sentiment, coupled with Singapore Medical Group’s higher operating cost as a result of its ongoing expansion plan.
  • Another overhang could be the price disparity between the conversion price (at SGD 0.423/share) of the convertible loan, and the sale of vendor shares (at SGD0.605/share), which may have raised some concerns as to minority shareholders’ interests.
  • The stock is currently trading at 14x P/E, a discount to peer average of 23x P/E.

We Upgrade to BUY From Neutral

  • We upgrade to BUY from Neutral, with an unchanged DCF-based Target Price of SGD0.48, given that Singapore Medical Group's share price has fallen 15% from SGD0.445 to SGD0.38, at a 52-week low since our downgrade on 10 May, see report: Singapore Medical Group - RHB Invest 2019-05-10: Growth Initiatives Need Time; Downgrade to NEUTRAL.
  • FY19F’s P/E was trading at 16.8x compared to the current 14.4x. We think this is a good opportunity to buy on dips.

Source: RHB Invest Research - 7 Jun 2019

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Labels: SingMedical

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