SINGAPORE O&G LTD (SOG SP) - UOB Kay Hian 2017-08-11: Lacklustre 1H17 But Attractive Valuation After Steep Share Price Decline

SINGAPORE O&G LTD (SOG SP) - UOB Kay Hian 2017-08-11: Lacklustre 1H17 But Attractive Valuation After Steep Share Price Decline SINGAPORE O&G LTD. 1D8.SI

SINGAPORE O&G LTD (SOG SP) - Lacklustre 1H17 But Attractive Valuation After Steep Share Price Decline

  • Whilst 1H17 earnings came in 10% below expectations, Singapore O&G (SOG)'s recent share price pull-back has factored in the disappointment. The shortfall is due to weaker contributions from its dermatology as well as higher staff costs. 
  • We reduce SOG's 2017/18 net profits by up to 18% and now forecast a 3-year profit CAGR of 12%.
  • We re-iterate BUY with a lower target price of S$0.59 (previously S$0.74) as we roll our target forward to 2018.



VALUATION

  • Attractive valuation after steep pullback, Maintain BUY with a lower 2018F PE-based target price of S$0.59 (previously S$0.74), as we roll forward to adjusted 2018 earnings pegged to 2018F industry multiple of 26.5x. 
  • With the steep share price pull-back of 33% since the peak in May, SOG is now trading at an attractive 2018F PE of 22x, which is at a 17% discount to peers. This is not warranted, given SOG’s higher 2018F ROE of 23% (v peers: 19%) and dividend yield of 3.8% (vs peers’ 2.4%). 
  • We believe the share is oversold, and now would be a good buying opportunity.


INVESTMENT HIGHLIGHTS


SOG's 1H17 earnings decline 6.4% yoy, below our and consensus estimates. 

  • SOG's 1H17 earnings recorded a 6.4% yoy decline to S$4.1m, which came in below our and street’s expectation (39-40% of FY17 estimates).

Revenue growth dragged by dermatology decline. 

  • 1H17 revenue grew 2.2%, contributed by growth from the O&G (+3.3%) and cancer-related segments (+34.6%), but offset by the decline in dermatology segment (-9.4% yoy). We understand that this was due to a decline in patient loads owing to softer medical tourism.
  • Nevertheless, SOG has begun cross-selling of Dr Joyce Lim’s products since May 17 as well as ramping up marketing of the clinics, which we hope can mitigate the fall in foreign medical patients.

New hires contributed to increases in operating expenses. 

  • In 1H17, staff costs grew up 7.9% yoy, exceeding top-line growth of only 2.2% yoy on the back of hiring of two new specialist medical practitioners and increase in clinical staff headcount.
  • Meanwhile, the group is planning to hire four more paediatricians for 2017 and 2018.
  • While we view the group’s expansion into paediatrics positively, we believe costs will remain elevated in the near term as we reckon it SOG will need 4-5 months to cover the costs of new doctors. 

Cancer segment gaining momentum. 

  • As of 1H17, cancer EBIT grew 80% yoy, driven by higher patients load. The revenue from Dr Lim, who joined in May 2016 is expected to offset her hiring cost by the end of 2017. Hence, we expect growth to accelerate in 2018.

O&G slightly impacted by Zika, but to normalise in 2H17. 

  • The number of deliveries remained flattish at 794 (about 1% yoy decline), which we understand to be largely due to the impact of the emergence of Zika virus in July last year as well as doctors going on leave. However, Zika may be a temporary deferment and we expect numbers to gradually recover in 2H17.

Reduced earnings by up to 18% for 2017-18F

  • Reduced earnings by up to 18% for 2017-18F to reflect lower revenue assumptions from mainly the dermatology segment as well as taking into account higher staff costs from the recruitment of additional doctors. 
  • Based on our new estimates, we now project a 3-year 2017-19F CAGR of 11.6%.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.59 Down 0.740



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