Singapore O&G - DBS Research 2017-05-15: Slow Start

Singapore O&G - DBS Vickers 2017-05-15: Slow Start SINGAPORE O&G LTD. 1D8.SI

Singapore O&G - Slow Start

  • Muted growth in 1Q17 impacted by dermatology division, and higher costs.
  • Number of births up 10%, market share at 7.4%.
  • Growth momentum picking up in cancer division.
  • Paediatrics division to commence in July 2017.



Maintain BUY rating, TP of S$0.80 (adjusted for share split). 

  • We maintain our BUY rating and remain positive on Singapore O&G (SOG)’s growth prospects. Key potential catalysts are: 
    1. better-than-expected growth from its cancer and dermatology divisions, 
    2. expansion into new specialisations such as paediatrics, which is expected to commence in July 2017, and complementary services including in-vitro fertilisation (IVF), imaging or childcare, and 
    3. better-than-expected improvement in margins.


1Q17 growth was muted. 

  • 1Q17 net profit was up 2.8% y-o-y to S$2m, forming 19% of our FY17F earnings. However, management highlighted that 1Q is typically the weakest quarter. In addition, we have factored in marginal contributions from paediatrics in our FY17 estimates. 
  • Key positives from the results: 
    1. number of births up 10% y-o-y, 
    2. positive growth momentum in cancer division; and 
    3. expects to commence paediatrics division in July 2017. 
  • Key negatives: 
    1. revenue of dermatology were flat, 
    2. O&G market share fell marginally to 7.4% (vs 7.5% in FY16), 
    3. EBIT margin deteriorated.


Expanding into higher-margin complementary specialised services. 

  • Now that paediatrics division will commence soon, management continues to explore new opportunities both in terms of new specialisations and/or new markets. We believe other complementary services to explore include IVF, child care and imaging.


Valuation

  • Our target price of S$0.80 (post share split) is based on the average valuation using 30x PE and DCF valuation. 
  • Our estimates have incorporated marginal contributions from paediatrics division.


Key Risks to Our View

  • Key risks that could derail our thesis include 
    1. Execution risks due to lack of track record, 
    2. highly dependent on a few key doctors, and 
    3. low stock liquidity.


WHAT’S NEW


A slow start 1Q17 (typically a weak quarter) growth was muted, partially impacted by dermatology and higher cost. 

  • Singapore O&G (SOG)’s 1Q17 net profit +2.8% y-o-y to S$2m; 19% of our FY17 estimates. However, management highlighted that 1Q is typically the weakest quarter. In addition, we have factored in marginal contributions from paediatrics in our FY17F earnings.
  • Revenue grew 6% y-o-y to S$7m led by O&G (+S$0.3m) and cancer (+S$0.1m) divisions while dermatology division was relatively flat.
  • EBIT margin dropped 1.6ppts to 34.2%, largely due to higher staff costs (+11%) from higher headcount (9 additional staff) of which 2 are specialist medical practitioners, and accrual of staff bonuses, which are now made every quarter (c. S$0.5m), lower government grants of S$37k from S$102k, and higher depreciation (55%). 
  • We note that higher fees of S$115k were recognised in 1Q16 for the acquisition of Dr Joyce Lim’s clinics, and excluding this, EBIT margin would have dropped by 3.3 ppts.

O&G division: Delivered 404 births (+10% y-o-y); market share fell marginally to 7.4%. 

  • Despite the number of national births falling 1% y-o-y, possibly due to the Zika virus scare in 1Q16, SOG delivered 404 births in 1Q17 (+10% y-o-y) but market share fell marginally to 7.4% from 7.5% in FY16.

Cancer division: Growth momentum picking-up. 

  • Revenue from the cancer division achieved positive growth with management continuing to see growth momentum picking-up further for the cancer division.
  • Dermatology division: Despite the strong FY16 results driven by the dermatology division, 1Q17 is typically a weak quarter.

Paediatrics division: On 5 Apr 2017, SOG announced the incorporation of SOG Children (Paediatrics) Pte Ltd.

  • Management expects that the new division will commence in July 17 with at least 1 new paediatrician on board.






Rachel TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.80 Same 0.80



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