Talkmed Group Ltd - TKMED surprises with proposed bonus issue
- 4Q16 and FY16 core net profit were in line with expectations at 29% and 104% of our FY16 forecast, respectively.
- Associate loss from HKIOC narrowed in 4Q16 to S$0.8m (SS$1.5m in 3Q16). We continue to expect associate profit of S$0.5m only in FY18F.
- Still holds net cash of S$64m with zero debt. Net cash was S$51.2m in 3Q16.
- A stable healthcare play, buoyed by long-term demand for oncology specialist services.
- Our TP rises to S$1.83 (WACC: 7.10%), as we roll over to FY18F DCF valuation.
- Now trades at FY18 P/E of 19x, with FY17-19F dividend yields of 3.9-4.5%. Add.
4Q16 earnings in line with expectations
- TKMED reported 4Q16 revenue of S$18.4m, up 2.4% yoy on the back of increased demand for higher-intensity care. FY16 revenue rose 4.9% yoy.
- As expected, employee expenses continued to increase due to higher staff strength and bonuses. Employee benefits climbed 5.8% yoy in 4Q16 and 11.4% yoy in FY16.
- Share of loss of associates widened 25.8% yoy in FY16 to S$3.6m.
- Company has proposed a 1-for-1 bonus issue.
Balance sheet rooted in cash
- The company ended 4Q16 with net cash of S$64.0m with zero borrowings. Cash accounted for 90% of its current assets at end-4Q16. The business needs no inventory.
- Net cash generated from operations was S$12.9m (126% of net profit) in 4Q16 and S$44.8m in FY16 (120% of net profit).
- Capex was a negligible S$103,000 in 4Q16. The current ratio was a robust 5.8x in 4Q16 (3Q16:5.8x).
Associate needs more time to turn profitable
- In Jun 2015, TKMED acquired a 30% stake in Hong Kong Integrated Oncology Centre Holdings Limited (HKIOC), an integrated oncology specialist that offers both diagnostic and treatment services in Hong Kong. Patient visits have been encouraging thanks to publicity efforts, but HKIOC remains loss-making due to high fixed costs (e.g. rental).
- Losses incurred by HKIOC in 4Q16 narrowed qoq but we continue to err on the side of caution and maintain our assumption of associate profitability of S$0.5m only in FY18F.
Re-rating catalysts and risks
- Potential re-rating catalysts include faster-than-expected turnaround of its associate, which has seen a qoq reduction in 4Q16 losses. Any accretive M&As (a strategy stated in its IPO prospectus) would also be positive.
- Key risks are the company’s high dependence on its CEO and founder Dr Ang and a negative outcome of Dr Ang’s appeal against the Singapore Medical Council (in the Singapore High Court).
Reiterate Add, with a higher DCF-based target price of S$1.83
- We raise our FY17 revenue forecast from 3.7% to 4.0% yoy, given the current strong momentum in its core business but increase cost assumptions, hence the 3.7% lower FY17F EPS.
- Minor opex tweaks lead to a 3.9% rise in FY18F EPS. WACC falls to 7.10% (8.4% previously) as we incorporate the latest 2-year stock beta and halve our liquidity penalty to 0.5% to reflect TKMED’s efforts to improve liquidity via the proposed 1-for-1 bonus issue.
- As we roll over to FY18F DCF valuation, our TP rises to S$1.83.