Singapore Medical Group (SMG SP) - Maybank Kim Eng 2017-06-05: Scalable Multi-disciplinary Healthcare Provider

SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group (SMG SP) - Scalable Multi-disciplinary Healthcare Provider

Singapore Medical Group (SMG)’s multi-disciplinary platform is a good proxy to the highly profitable and fragmented medical specialist segment, where the largest player only commands c.8% market share. Its platform differentiates it from other listed healthcare players due to its focus on a wider range of specialties.

SMG’s group model appeals to young start-up doctors, and as the platform grows, SMG will attract more senior doctors. For organic expansion, it aims to grow its established segments. SMG has been able to source and secure profitable and synergistic deals led by the CEO who has a good track record of turning around struggling companies.
Also, Tony Tan, who is the largest shareholder and chairman of SMG, is an important figure with good connections and experience. He is the founder of Parkway Group (IHH Healthcare today).
Maintain BUY and TP of SGD0.78.

We expect SMG to record a 3-yr EPS CAGR of 72% for FY16-19E.
FY17E EPS growth of 225% will be driven largely by the newly acquired Astra Women’s Specialist Group in Feb 2017 and proposed acquisition of two paediatric clinics announced in Apr 2017. Astra should contribute c.50% of FY17E EPS.
In the future, SMG aims to add at least SGD1m in earnings via M&A each year. Also, it targets to double the no. of specialists in its Women’s Health segment to 16 over the next 3 years.
For the health screening segment, SMG is considering adding more equipment.

Competition from other integrated and specialised players, for patients and talented specialists;
failure to integrate M&A targets and manage increasing pool of doctors; and
Regulatory risks that involve pricing and profit guarantee for M&As.

Our TP of SGD0.78 is based on 27x FY18E EPS, pegged to the simple average of 2-yr forward P/E mean of small-cap healthcare peers in Singapore (Q&M Dental Group, ISEC Healthcare, Singapore O&G).
We note that on a 2-year forward average, the smaller healthcare peers in Singapore have traded from around a 12% premium to 41% discount against the market leader. We believe there is room for a higher P/E multiple for the following reasons.
1. Growth potential from M&A, which has yet to be factored in, aside from:
  1. Astra’s Women Specialist Group that will contribute c.50% of FY17E EPS; and
  2. two pediatric clinics that will contribute c.10% of FY17E EPS.
  SMG targets to add at least SGD1m in earnings from M&A each year, which could lift EPS by c.7% each year. We note that its well-connected shareholders could also help to source more deals;
2. Better-than-expected growth from organic expansion from more new doctors and increasing capacity from new equipment;
3. Growth in size and better track record, which could enable SMG to start attracting more institutional funds or strategic shareholders;
4. Healthy turnaround in FY16E and strong EPS growth profile with FY17E and 18E EPS of 225% and 34%, respectively.

Increasing discovery could re-rate the stock. A longerterm 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 to integrate 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/ 2017-06-05

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.780 Same 0.780