Singapore O&G (SOG SP) - UOB Kay Hian 2017-02-17: 2016 Solid Earnings, Broadly In Line With Expectation

Singapore O&G (SOG SP) - UOB Kay Hian 2017-02-17: 2016 Solid Earnings; Broadly In Line With Expectation SINGAPORE O&G LTD. 41X.SI

Singapore O&G (SOG SP) - 2016 Solid Earnings; Broadly In Line With Expectation

  • Singapore O&G (SOG) reported a strong set of earnings (+64.8% yoy), where on an adjusted basis, 2016 earnings were broadly in line with our estimate. 
  • Earnings were supported by strong revenue contribution from the new dermatology segment as well as increased patient loads across the O&G and cancer-related segments. 
  • Given that the group is debt free and highly cash generative, we see potential for its valuation to expand should there be more accretive acquisitions. 
  • Maintain BUY and raise PE-based target price to S$1.48.



RESULTS


Adjusted 2016 earnings broadly in line with expectation. 

  • For 2016, Singapore O&G (SOG) recorded a net profit of S$8.8m, which represents a stellar 64.8% yoy increase from 2015. However, earnings were impacted by a non-cash finance expense of S$0.5m relating to the unwinding of the implicit discount in the second and third cash tranche considerations for the acquisition of Dr Joyce Lim’s practice. 
  • Adjusting for this non-cash finance expense, net profit after tax of S$9.3m would have been broadly in line with our estimate (representing 94% of our full year estimates). 
  • The group declared a final interim dividend of 1.57 S cents. Its total DPS of 3.10 S cents represent a payout of 80%, on an adjusted EPS basis.

Earnings supported by revenue contribution from all segments. 

  • 2016 revenue increased 74.7% yoy, largely due to revenue contribution of S$8.5m from the new dermatology segment, as well as increase patient loads across the obstetrics and gynaecology (O&G) and cancer-related segments. 
  • However, earnings were also impacted by higher consumables and medical supplies used, which increased 135% yoy to S$4.4m in terms of value for 2016. This was largely attributable to more consumables and medical supplies used in the dermatology clinic, which totaled S$2.0m.

Dermatology continues to perform well. 

  • The dermatology segment performed well in 2016, where net earnings of S$2.6m exceeded the full-year net profit agreement of S$2.5m marginally. Earnings were supported by strong revenue contribution of S$8.5m in 2016, where dermatological products continued to be the main growth driver (about 50% of segmental revenue). 
  • Joyce Lim’s business recorded a net margin of 30.4%, which is in line with our estimate of 28-33%. 
  • Going forward, believe net margin for dermatology is likely to be maintained at 30%, with potential for further improvement as SOG further ramps up efforts on product development. We are also expecting a new aesthetician to come onboard by 2H17.

Resilient showing from O&G segment. 

  • On an industry level, 600 fewer babies were born in Singapore in 2016 than in the previous year. 
  • Nevertheless, SOG was able to record a 5.8% increase in deliveries for 2016 to 1,728 babies, increasing its market share in the private sector from 6.7% in 2015 to 7.5% in 2016. 
  • Like in 2015, Dr Heng continued to take up a sizeable amount of the delivery pool. Nevertheless, we are also seeing Dr Natalie Chua picking up pace in the number of deliveries.

Cancer segment contributed positively in 2016. 

  • SOG’s three cancer specialists, Dr Cindy, Dr Radhika as well as Dr Lim Siew Kuan in aggregate, contributed S$2.8m to segmental revenue (from S$1.5m in 2015) in 2016. The cancer segment has also contributed positively to the group’s net earnings, recording a net profit margin of S$0.4m, as opposed to an operating loss in 2015.

Potential expansionary plans. 

  • Given that the group is debt free and highly cash generative due to low capex, we believe a M&A strategy and expansion plans could be in order. 
  • We believe the group is likely to expand into complementary offerings for paediatrics this year, which would bring SOG one step closer to becoming a full-service women and children’s health business.


EARNINGS REVISION/RISK

  • Introduce 2019 earnings forecast; trim 2017-18 earnings forecasts by 5-6% to account for more consumables and medical supplies used in the dermatological segment.
  • Key risks include: 
    1. regulations and licensing requirements for its operations, 
    2. its ability to obtain the requisite approvals, licences and/or permits, 
    3. reputational risks or changes in regulations, and 
    4. earnings concentration risk from key specialist medical practitioners such as Dr Heng and Dr Joyce Lim.


VALUATION/RECOMMENDATION


Maintain BUY with a higher PE-based target price of $1.48. 

  • Given the group is debt free and highly cash generative, we see potential for its valuation to expand should there be more accretive acquisitions. 
  • In our view, SOG is a compelling healthcare stock with an attractive combination of growth in dividend yield and a 3-year EPS CAGR of 20%.
  • Maintain BUY with a higher target price of S$1.48, based on higher 2017F peers’ PE of 30.7x (previously 28x).




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-17
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.480 Up 1.430



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