Singapore O&G - Baby growth spurts
- FY16 net profit up 65% y-o-y to S$8.8m.
- Organic operations 26% higher y-o-y; new dermatology division contributed 30% of FY16 earnings, and met minimum guarantee.
- Hopes to commence Paediatrics division in 2H17.
- Final dividend 1.57 Scts, total in FY16 was 3.1 Scts.
Maintain BUY rating, raised TP to S$1.60.
- We maintain our BUY rating and remain positive on Singapore O&G (SOG)’s growth prospects. Key potential catalysts are:
- better-than-expected growth from its cancer and dermatology divisions,
- expansion into new specialisations such as paediatrics, and
- better-than-expected improvement in margins.
Strong FY16 results across all divisions.
- FY16 net profit grew 65% y-o-y to S$8.8m, with the contribution from Dr Joyce Lim (met minimum project guarantee) offset by an implicit discount to the deferred payment for acquisition of Dr Joyce Lim’s practice.
- Excluding the impact from the implicit discount, net profit grew 73% y-o-y to S$9.3m, in line with the street.
- Key positives from the results:
- increase in obstetrician & gynecology (O&G) division’s market share to 7.5%,
- Dr Joyce Lim has met her minimum profit guarantee;
- cancer division turned profitable and continues to grow; and
- management hopes to start a new division - paediatrics - in 2H17.
Expanding into higher-margin complementary specialised services.
- With the O&G business now achieving >1,500 births per annum, management believes that O&G would be able to support a new paediatrics division. Management hopes to start the new division in 2H17.
- Management continues to explore new opportunities both in terms of new specialisations and/or new markets. We believe other complementary services to explore include in-vitro fertilization (IVF), child care and imaging.
- We revised our FY17F-FY18F earnings by -2% to 5% to factor in the implicit discount to deferred payment and marginal contribution from potential commencement of paediatrics division.
- We raised our target price to S$1.60 (from S$1.50), based on the average valuation using 30x PE and DCF valuation.
Key Risks to Our View
- Key risks that could derail our thesis include
- Execution risks due to lack of track record,
- highly dependent on a few key doctors, and
- low stock liquidity.