Singapore O&G - UOB Kay Hian 2015-12-15: Mid-cap Spotlight

Singapore O&G - UOB Kay Hian 2015-12-15: Mid-cap Spotlight SINGAPORE O&G LTD 41X.SI 

Mid-cap Spotlight – Singapore O&G 

  • SOG is well poised to benefit from firm demand for private healthcare in Singapore. 
  • We believe its recent acquisition of Dr Joyce Lim’s aesthetics business will put SOG on a new growth trajectory. 
  • Maintain BUY with a PE-based target price of S$0.90 (unchanged). 


 Hello Taiwan. 

  • We hosted the management of Singapore O&G (SOG) at a non-deal roadshow (NDR) in Taiwan recently. This report highlights the key takeaways from the NDR. 


 Strong presence in niche segment of private healthcare. 

  • Investor interest in SOG was strong given that it is one of Singapore’s leading niche groups specialising in women’s healthcare. 
  • Most of the group’s medical practitioners have a track record of more than 10 years and we believe the group is on track to deliver strong earnings growth in the next few years. 

 Accretion from recent acquisition. 

  • We are excited about SOG’s acquisition of Dr Joyce’s aesthetics business, which is synergistic to SOG. This will allow SOG to expand its offering of services complementary to women’s healthcare. 
  • Dr Joyce also holds one of the difficult-to-get licenses that allow her to train other aesthetic professionals and this enables SOG to develop aesthetic professionals who can treat patients at its clinics across Singapore. 
  • Furthermore, Dr Joyce Lim also offers cosmeceutical skin care products, which can be sold across SOG’s clinics, given that 25-30% of pregnant ladies are expected to have skin pigmentation. 
  • As a result, we had earlier raised our 2016-17F EPS by up to 29%. We understand that the acquisition of Joyce Lim’s business is expected to be completed soon, before the year end. 

 More accretive M&As in the pipeline? 

  • In our view, we see potential for more M&As or new ventures going forward. Possible focus areas include pediatrics and the provision of confinement care services. These areas could be synergistic to SOG’s core business and offers strong potential for cross-selling and referrals. However, these potential expansion opportunities have not been factored into our estimates. 
  • Attractive dividend payout of up to 90%. Although the group has the intention to distribute up to 90% of its net profit after tax in dividend payouts, we have conservatively assumed an 85% payout for 2015. This implies decent 2015-17 dividend yields of 2.6- 4.7%. 
  • Given that SOG is debt-free, highly cash generative (as capex is low) and growing in profitability, we think there is potential upside risk to our dividend forecasts. This is because dividends will form an important segment of the compensation for the core team of doctors. 

 Liquidity concerns. 

  • An issue raised by institutional investors is the low trading liquidity on SOG. We share these concerns but we think that there could be several ways that management could eventually address these concerns including the option of offering scrip dividends to shareholders rather than cash or a stock split. 


 Solid EPS CAGR of 29% over 2015-17. 

  • We maintain our earnings forecasts and project an EPS CAGR of 29% (over 2015-17F) after the acquisition of Joyce Lim’s business. 
  • There could be potential for earnings upside from 2016 onwards should there be additional synergies from Joyce Lim, new recruits or accretive M&As. 
  • Another contributor for a potential upside is higher prices, particularly for its obstetric treatments, which we understand is estimated to be 20% below treatment prices on average. 

 Key risks include: 

  1. regulations and licensing requirements for its operations, 
  2. its ability to obtain the requisite approvals, licenses and or permits, 
  3. reputational risks or changes in regulations, and 
  4. earnings concentration risk from key specialist medical practitioners such as Dr Heng and Dr Joyce Lim. 


 Maintain BUY. 

  • SOG remains on our BUY list and its recent share price retracement is a buying opportunity. We have a PE-based target price of S$0.90, but we see potential for its valuation to expand if there are more accretive acquisitions or if contributions from the business of Joyce Lim exceed estimates. 
  • We see potential in the latter, given the scalability of Joyce Lim’s business and its strong branding. In our view, SOG is a compelling healthcare stock with an attractive combination of growth in dividend yield and EPS (3-year EPS CAGR of 29%). 

 Yields of 4-4.7% for 2016-17, with potential upside. 

  • Based on a payout of 85%, we estimate dividend yields of 4-4.7%. However, there could be potential upside if earnings exceed our expectations or if management payout 90% of earnings.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.90 Same 0.90