Singapore Medical Group (SMG SP) - UOB Kay Hian 2018-01-26: A Premier Healthcare Platform From Cradle To Grave

Singapore Medical Group (SMG SP) - UOB Kay Hian 2018-01-26: A Premier Healthcare Platform From Cradle To Grave SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group (SMG SP) - A Premier Healthcare Platform From Cradle To Grave

  • Singapore Medical Group (SMG) has transformed into a premier healthcare platform that aims to capture a premium audience for its ecosystem which will serve patients from cradle to grave. 
  • As a proxy to emerging markets and a platform spanning a wide range of medical specialties, we expect 2018 to be a year to remember as SMG reaps the fruits of acute deals made in prior years. 
  • Initiate with BUY on this high-growth medical platform gem with a street-high target price of S$0.83.



INVESTMENT HIGHLIGHTS


REGIONAL MEDICAL PLAY CATERING TO PREMIUM PATIENTS FROM CRADLE TO GRAVE 


Premium audiences demand premium services. 

  • Singapore Medical Group (SMG) is the largest local premium-focused healthcare platform that caters to the demanding premier healthcare audience. The company is able to offer its clientele first class healthcare treatments and services.
  • SMG’s 24-hour patient centre is a 24-hour one-stop medical concierge service centre to assist international and domestic patients with immediate and reliable access to medical specialists in the core and associate SMG specialities in Singapore. As a first point of contact, the concierge service is able to provide a wide range of non-medical services such as flight arrangements, visa extensions, billing, financial counselling, insurance arrangement, evacuation and direct admission to hospital, interpreter services and airport pick-up and transportation.

With diverse medical specialities. 

  • SMG currently has a network of more than 20 medical specialities, where the group has approximately 40 full-time doctors as well as associate doctors. The number of doctors has grown substantially over the years and we expect this to grow substantially over the next few years as existing clinics continue hiring new doctors together with new acquisitions which will add to the current headcount. 
  • The group’s business can be broadly classified into three revenue segments, namely healthcare, aesthetics and diagnostics. The group operates across a wide spectrum of medical specialities namely cardiology, dentistry, endocrinology, gastroenterology, general medicine, oncology, neurosurgery, O&G, ophthalmology, orthopaedics, ENT, paediatrics, plastic surgery, psychology, radiology and urology. 
  • By having a spectrum of offerings, SMG aims to retain its premium clientele in the SMG ecosystem.

Medtech an area of potential growth. 

  • On top of exploring acquisitions in new verticals which will enhance the existing suite of offerings to clients, we believe SMG could also explore investments or collaborations in the forefront of medtech. 
  • SMG’s strategic shareholder CHA Healthcare Company (CHA) which owns a 6.6% stake in SMG, runs general and specialty hospitals and 27 research and educational institutions. CHA has expertise in many medtech specialties such as immunotherapy. CHA also has a biotech affiliate and an anti-aging life centre. By bringing new cutting-edge medical expertise, SMG will be able to offer clients in its ecosystem differentiated offerings from local competitors.

Venturing into Vietnam with investment in CityClinic Asia. 

  • In early-Jan 17, SMG made a strategic investment in Vietnamese healthcare operations, CityClinic Vietnam, a multi-disciplinary healthcare specialist clinic which focuses on health screenings, women’s health, paediatrics and diagnostics imaging for corporate and residential clientele in one of the largest residential districts, Tan Binh District of Ho Chi Minh City.

Riding the Vietnam growth story where healthcare is still underserved. 

  • We are buoyant about Vietnam’s healthcare market given the positive demographic trend in the country. With a growing demographic, higher income and longer lifespan, demand for healthcare services in Vietnam is well-positioned for strong growth. 
  • Furthermore, we note healthcare in Vietnam is still largely underserved, where according to the World Health Organization, there are currently only an average of 7-8 healthcare workers and 25 hospital beds for every 10,000 Vietnamese citizens. This is lower than the global average of 15 healthcare workers and 30 beds per 10,000 people. We therefore see huge opportunities for SMG to tap into the underserved healthcare market in Vietnam.

Strategic location in prime district. 

  • The clinic is strategically located next to a business complex with 72,000 sqm of office space, where the clinic spans seven floors with 15,000 sf of service area with over 24 examination rooms and six patient waiting lounges. As the clinic is situated in a prime location in one of the wealthiest districts of the city, this positions the group favourably to target the affluent local and expatriate populations. SMG operates two clinics in Vietnam currently. 
  • We expect both clinics to deliver a positive EBITDA performance in 2018 due to strong demographics and low supply of premium healthcare in Vietnam.

JV with PT Ciputra in Jakarta. 

  • SMG also has operations in Jakarta, Indonesia where they operate an eye specialist clinic. The clinic is a JV with PT Ciputra, a leading property developer in Indonesia. SMG owns a 40% stake in the JV. The eye specialist clinic offers three services namely:
    1. ReLEx SMILE which is the latest generation of laser vision correction; the first of its kind in Jakarta,
    2. Femto-Lasik which is the safest form of Lasik surgery that utilises femtosecond lasers; and
    3. general cataract surgery.
  • The clinic currently has six ophthalmologists.


PROVEN EXECUTION AND M&A EXPERTISE 


Fast-paced expansion plans through both organic and inorganic paths. 

  • In the past three years, SMG has engaged in fast paced expansion plans across different medical specialties. The group’s growth roadmap involves both organic as well as inorganic expansion where inorganic expansion is carried out through realising both revenue and cost synergies.

Proven execution with successful turnaround of imaging business. 

  • SMG first acquired a 38.1% stake in Lifescan Imaging in Jul 15 when it was a loss-making entity. Through the group’s management and extracting of synergies with its other existing core specialties and medical network, SMG was able to successfully turn the business around and achieve profitability within the year. Since then, the group has grown to become a significant diagnostics radiology player in the private healthcare marketplace through acquisitions. 
  • In Apr 16, SMG fully acquired Novena Radiology, an entity which owned two imaging centres at Novena and subsequently in Aug 16, the group acquired the remaining 61.9% stake in Lifescan Imaging.

Branching into Obstetrics & Gynaecology. 

  • In Oct 16, the group announced the acquisition of Astra Women’s Specialist group of clinics, which comprises six O&G clinics along with five doctors. Currently, the group has in aggregate eight O&G doctors, making it one of the largest specialist practitioners in the private sector dedicated towards women’s health and wellness. 
  • We expect the group to continue expanding the O&G segment.

Extending into complementary service in paediatrics. 

  • More recently, the group further diversified its spectrum of specialties by branching into paediatrics. In 2017, the group successfully completed the acquisition of three paediatric clinics for an aggregate sum of S$33.2m. Following the acquisitions, the group has three paediatrics clinics located both in heartland locations Bishan and Toa Payoh as well as Mount Alvernia Hospital. 
  • We view the group’s venture into paediatrics positively as it serves as a complementary and synergistic vertical offering to the group’s value chain, allowing for cross-selling and referrals, with strong support from the group’s existing O&G segment.

Astute acquisitions with successful integration. 

  • We have been very impressed by SMG’s acquisition history. The group has acquired different specialist verticals over the last few years, almost all of which have been earnings accretive. The company has paid low acquisition multiples of below 13x forward earnings which we deem as cheap. 
  • SMG has also done a very good job in integrating these acquisitions and adding synergistic value through cross selling and cost savings.


NETWORK EFFECT LEADS TO BETTER ABILITY IN ATTRACTING ESTABLISHED MEDICAL PRACTITIONERS 


Network effect kicking in as SMG grows. 

  • The network effect is a term given to platforms where the value of each user is increased as the number of users on the system grows. Therefore, as more people use the product and service, the higher the value of the overall platform. As SMG expands both organically and inorganically, it will start to reap the benefits in the form of administrative benefits, network knowledge and resource orchestration.
  • According to Forbes, doctors spend about 50% of their time doing paperwork which includes uploading electric health records, lab orders and other administrative tasks. SMG has centralised most of the mundane paperwork which frees up time for its doctors to allocate more time to what matters - seeing patients.
  • By having a network of medical specialties, SMG is able to cross-sell products and refer patients to internal SMG clinics. Patients will then have the benefit of patient data being accessed easily through the cloud by different specialists in the SMG network.
  • Furthermore, it will elicit communication between different specialists in the network which will benefit patients through more effective diagnosis.
  • By more effective resource orchestration, clinics within the SMG platform are able to procure medicine, disposables and equipment in bulk which may result in further cost savings. 
  • Marketing and branding on social media and search engine optimisation is also centralised which helps to more effectively drive patient load growth for doctors and clinics on the SMG platform.

Attracting more established doctors. 

  • As SMG expands, management has indicated that it has become easier to attract well-established doctors to join the SMG platform. Shareholder and doctor interests are aligned as senior doctors are put on a variable compensation plan while more junior doctors are put on a more fixed incentive plan.
  • Certain key personnel also have shares in SMG. For instance, Dr Wong Seng who is the Medical Director and Consultant Medical Oncologist of The Cancer Centre (Singapore Medical Group) owns about 3.7% of SMG.


INDUSTRY 


Ageing population to drive healthcare demand. 

  • We remain buoyant on the Singapore healthcare market, underpinned by an ageing population. According to the World Health Organization, the average life expectancy in Singapore was 83.1 years, ranked third in the world behind Japan (83.7 years) and Switzerland (83.4 years).
  • Separately, according to statistics from the Ministry of Health, we note that the proportion of the population aged above 65 has been on an upward trend from 11.2% in 2014 to 12.4% in 2016.
  • Given the ageing population, we expect demand for healthcare to continue increasing going forward. According to Finance Minister Heng Swee Keat, government healthcare spending is targeted to rise “quite sharply” over the next three to five years. As an indication of the magnitude of spending, between 2011 and 2016, annual healthcare expenditure has more than doubled from around S$4b in 2012 to approximately S$10b in 2016. This figure is projected to grow to S$13b by 2020.

Medical tourism. 

  • The Southeast Asian (ASEAN) medical tourism industry has experienced rampant growth in the last few years driven by better quality healthcare delivery services, competitive rates and reputable medical expertise. Thailand, Singapore and Malaysia are the most popular destinations for medical tourism in the ASEAN region. 
  • The lack of specialised treatments in some home countries has driven more affluent citizens to seek medical treatments in countries like Singapore and Malaysia. Even though costs in Singapore are high, Singapore should remain a preferred destination in specialised areas such as cancer and cardiology.


FINANCIALS 


3-year revenue CAGR of 33% for doctor headcount and revenue intensity. 

  • We expect top-line to be bolstered by growth in the expansion of clinics as well as the growth in the number of doctors. Since 2015, we note that the number of doctors in SMG had expanded from 26 in 2015 to around 40 as of the latest available information.
  • Going forward, we expect the group to continue growing organically through the hiring of doctors as well as expansion of clinic network. Based on our projection, we expect the number of doctors to continue growing to about 45 by the end of 2018.

Core earnings driven by inorganic and organic growth, expect margin expansion.

  • Historically, the group’s gross margins have tracked 33-36% from 2014-16. We expect continued margin expansion on the back of the newly acquired paediatric clinics as well as potential acquisitions going forward. 
  • Going forward, we also expect SMG to continue recruiting more doctors through either organic or inorganic expansion. We currently project a 3-year earnings CAGR of 68% from 2016-19.

No fixed dividend policy. 

  • SMG currently does not have a fixed dividend policy. We note that the group has not paid any dividends since 2011. 
  • We do not expect the company to pay any dividends going forward as they embark on aggressive expansion plans.


KEY RISKS 


Ability to attract and retain skilled and qualified personnel. 

  • The healthcare industry in Southeast Asia is very competitive, where the group faces competition from existing healthcare service providers. Competition for specialist doctors is high in the healthcare industry and the group’s ability to attract, develop and retain skilled and qualified personnel is essential to the success of the company.

May not be able to obtain the requisite approvals, licences and/or permits or renew current approvals, licences and/or permits upon their expiration. 

  • The group and healthcare professionals require various approvals, licences and permits to operate. Obtaining renewals of the requisite approvals, licences and/or permits are subject to compliance with the relevant laws and regulations. 
  • In the event that the group is unable to obtain or renew the requisite approvals, the group may be required to cease development or operations and the group’s business may be adversely affected.

Legal and regulatory risks. 

  • The healthcare industry is subject to extensive legislation, government regulation and regulatory changes. Any rejection of the licences, approvals or permits may have an adverse effect on the group’s business. 
  • Any failure to comply with the laws and regulations or conducts of the industry practices could result in imposition of fines or penalties by authorities.


VALUATION 


Initiate coverage with BUY and PE-based target price of S$0.83. 

  • We initiate BUY with a PE-based target price of S$0.83, pegged to peers’ 2018F PE of 26.8x. 
  • Given the group’s high growth trajectory, we deem the valuation justifiable given that we expect Singapore Medical Group (SMG) to record 3-year EPS growth of 68%. 
  • Based on our target forward 2018F PE of 26.8x and the 3-year EPS CAGR of 68%, the implied 2018F PEG ratio is an attractive 0.4x. This compares well against the market’s PEG of 3.6x. 
  • Going forward, we see potential for earnings upside as the group embarks on aggressive EPS-accretive M&A expansion.






Nicholas Leow UOB Kay Hian | Andrew Chow UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-26
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 0.83 Same 0.83



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