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.
- 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.
- 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.