Singapore Medical Group (SMG SP) - Maybank Kim Eng 2017-02-28: Turnaround sustainable, More opportunities await

Singapore Medical Group (SMG SP) - Maybank Kim Eng 2017-02-28: Turnaround sustainable, More opportunities await SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group (SMG SP) - Turnaround sustainable, More opportunities await


Robust results; TP raised 14% 

  • We have raised our TP 14% (to S$0.67) after rolling forward the valuation base year to FY18E, with an unchanged P/E of 27x, pegged to the average two-year forward mean of small-cap healthcare peers in Singapore. 
  • FY16 net profit was in line with our estimate, led by robust growth in two key segments: healthcare and newly-formed diagnostic & aesthetics. 
  • FY16 core earnings were SGD2.0m, up from a loss of SGD0.2m in FY15.


Operating cash flows also improved, at SGD4.3m vs. SGD0.4m. 

  • The turnaround was more apparent, as 2H16 core earnings more than doubled from 1H16 to SGD1.3m. 
  • With the recently proposed capital injection and strategic tie up with CHA, a leading medical group in Asia, SMG is well-positioned to explore more growth opportunities across Asia.


Key segments delivered strong growth 

  • Revenue and gross profit increased 34% and 54% YoY for FY16, driven by robust growth in the healthcare (+35% YoY) and the diagnostics and aesthetics segment (+32% YoY). 
  • To recap, SMG expanded its screening business in 2016 with the acquisition of Novena Radiology in Apr and Lifescan Imaging in Sep. Management has successfully turned around both entities and promotes cross-selling opportunities within SMG’s network. 
  • Under the healthcare segment, oncology, obstetrician and gynaecology (O&G) and health screening recorded healthy growth.


Growth drivers: M&A and overseas expansion 

  • SMG completed the acquisition of the Astra Women’s Specialist Group this month. This is a chain of seven O&G clinics, with a strong track record in women’s health. With a profit guarantee of SGD4.6m pa over the next five years, the acquisition will be a major earnings contributor.
  • For overseas expansion, SMG entered Vietnam in Jan-17 through a JV with CityClinic Asia Investments, which includes two clinics in Ho Chi Minh City. We expect this to contribute to earnings after its ramp-up phase. 
  • With the recent SGD15m proposed strategic placement to CHA Healthcare, SMG will pursue strategic projects in the area of women’s health and tap on the growing Korean community in ASEAN.


Swing Factors


Upside

  • Increasing discovery could re-rate the stock. A longer-term scenario incorporating 33x industry leader’s P/E in FY19E EPS suggests 61% upside to a TP of SGD0.95.
  • More M&A: we have not factored in any future acquisitions. Every SGD1m profit acquisition could raise FY7E EPS and TP by at least 7%.
  • Faster-than-expected earnings growth from existing businesses and newly-acquired entities.

Downside

  • Failure in integrating M&A targets. Acquisition of women’s health group is SMG’s largest acquisition and integrating the business might require more resources.
  • Failure to maintain profitability for recently turned around businesses, as SMG might overspend on expansions.
  • Competition from other integrated and specialised players. They could take away SMG’s patients and specialist doctors.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-28
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.67 Up 0.590



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