ISEC HEALTHCARE LTD
40T.SI
ISEC Healthcare (ISEC SP) Don’t Just Eye It, Buy It!
Cheapest healthcare stock with best upside
- We took ISEC for NDRs in Singapore and Malaysia. According to CEO Dr Wong Jun Shyan and Vice Chairman Dr Lee Hung Ming, the slate has been wiped clean for a 2016 rebound, driven by organic growth, end of startup losses and M&As.
- Following SSEC’s acquisition in Dec 2015, the pace of M&As should also pick up. Up to five are in the works, which could potentially double profits if closed. We have not included any acquisitions in our forecasts other than SSEC.
- ISEC is the cheapest in our healthcare universe at just 15x P/E.
- Maintain BUY & SGD0.40 TP, at 27x FY16 EPS, a 20% discount to peers on account of its smaller size.
1. FY16 to rebound after poor FY15
1.1 Slate wiped clean in FY15…
- One year after its IPO in Oct 2014, ISEC has cleaned up its house and shut down its Mount Elizabeth Novena eye-clinic start-up that bled SGD2.6m last year. The last of Novena’s operating and renovation costs should have been fully reflected in 4Q15, after ISEC booked SGD1.3m in 9M15.
- Management already warned as far back as six months ago that Novena’s closure would hurt FY15. The write-offs would clean the slate for profits to double in FY16, potentially.
- While MYR weakness lingers, ISEC has shown it can overcome this even without acquisitions.
- 9M15 revenue from Malaysia rose 5% YoY in SGD despite a near-20% plunge in MYR. In MYR terms, the growth was a rosy 15%.
1.2 …setting the stage for FY16 rebound
- With these, we expect FY16 profits to double YoY. Straightaway, the absence of Novena’s losses should plough SGD2.6m back to its bottom line. There should also be full-year contributions from newly-acquired SSEC.
- Its first major accretive acquisition, SSEC is based in Melaka, Malaysia. ISEC paid MYR37m or SGD12m for SSEC: SGD5m or 43% in cash and SGD7m or 57% in shares. These were issued at SGD0.23 apiece.
- We estimate SSEC’s full-year contributions at SGD1m or 15% of FY16E earnings. Return on investment is expected to be 10% vs ISEC’s WACC of 6%.
- There is upside potential as our forecast is conservatively based on its historical performance. Returns could potentially be higher from organic growth and/or plans to offer Lasik services in Melaka, the first in southern Malaysia. As there are no Lasik clinics south of KL, demand from the south is currently fulfilled in KL. Equipment will be transferred from ISEC Novena to SSEC.
2. More M&As about to start
2.1 First success gives notice that consolidator is on the prowl
- Other than direct contributions, we believe SSEC is a breakout deal that will alert ophthalmology practices across South-East Asia to a well-funded consolidator on the prowl with a long-term vision compelling enough for eye doctors.
- SSEC was valued at 12x historical earnings, which is expected to be the benchmark for ISEC’s future acquisitions.
- In our view, ISEC has an unprecedented chance to consolidate South-East Asia’s ophthalmology market, à la dental specialist Q&M (QNM SP, BUY, SGD0.97) in the dental space in Singapore and China.
- As a first-mover and market leader, ISEC should be able to attract cream-of-the-crop eye doctors. Its grouppractice platform should also allow it to expand into adjacent specialties such as aesthetics as well as general practice (GP).
2.2 4-5 deals could close in 2016
- In Malaysia, ISEC has signed three non-disclosure agreements with ophthalmology practices in Seremban, Johor Bahru and East Malaysia.
- In Singapore, it is doing advanced due diligence on a chain of GP and aesthetics clinics, in its first effort to diversify into complementary specialties to capture adjacent market value.
- In Vietnam, it has inked a new MOU with Hai Yen Group, a private company. This replaces ISEC’s lapsed MOU with Cao Thang Hospital in Ho Chi Minh City.
- ISEC guides that the above deals are likely to be concluded in 2016. For prudence, we have not included them in our forecasts.
- Singapore. Going by the stage of its negotiations, we believe that its Singapore deal is closest to completion. Valuations are believed to be palatable to both parties. A financial advisor could be appointed soon. The deal could add SGD1-1.5m pa to ISEC’s bottom line.
- Malaysia. At least two of its three non-disclosure agreements could be concluded in 2016. In our view, the JB clinic acquisition is likely to make the fastest progress.
- Vietnam. We believe its second MOU (Hai Yen Group) in Vietnam has a higher chance of success than its first with Cao Thang Hospital. ISEC has appointed a COO, a Vietnamese-speaking Malaysian based in Vietnam, to shepherd this deal on a contract basis; he may be permanently appointed if the deal is successfully closed.
2.3 Deals further afield
- Negotiations on other regional deals have also started, in Taiwan, Indonesia, Cambodia, Myanmar and China. However, talks are likely to take longer due to cross-border obstacles such as cultural differences, language barriers and regulatory unfamiliarity, as well as securing the right partners.
2.4 Enough cash firepower to double profits, halve valuations
- ISEC had net cash of SGD27.3m as at end-3Q15. This will be dedicated to M&As. Its two practices in Singapore and Malaysia generate ample cash for working capital.
- Assuming the next few deals are of SSEC’s size and structured as 50% shares and 50% cash, ISEC should have enough internal resources to seal another five deals. It is mainly interested in buying established practices that can immediately add to earnings.
- Assuming similar profitability per deal of SGD1-1.5m pa, its core profit of SGD6-7m could potentially double, halving its current FY16E valuation of 15x.
3. Q&M already blazed the way
3.1 Strong parallel that resonates with investors
- Singapore investors are no strangers to M&A-spurred growth in healthcare. The foremost small cap in this space, dental specialist Q&M, has already blazed the trail for ISEC, repeatedly using shares as its acquisition currency. ISEC is following in the footsteps but there is one marked difference. Unlike Q&M, ISEC does not have a stranglehold on its early shareholders and allows them to sell at any time. This could play a decisive role in their respective end-games.
- For Q&M, the clock is ticking. Management needs to deliver on promises made to its strategic shareholders, especially the sellers of its acquired businesses. To encash investments for these significant shareholders, possible solutions are IPOs or finding a buyer for the whole group. Q&M’s exit would depend on a few things, including management’s ability to execute, the state of equity markets that may delay IPOs and possible shareholder pressure to end their moratoriums early.
- For ISEC, there is no such deadline or pressure. With its stock below IPO price, all shareholders will be highly motivated to ensure a shareprice recovery, either by working harder on profit growth or hastening M&As. While there is no moratorium except on the sellers of its acquired businesses, we believe the doctors are highly unlikely to sell out. Not only does ISEC’s group practice give them a platform to practise without the bother of dealing with operations but it offers them institutional protection before their skills are lost to age. Most specialists only come into their prime earnings years in their 40s and have about 25 years to practise before age impairs their ability to operate. During this time, occupational accidents may also curtail their careers. Hence, dividend-yielding equity in ISEC is seen more as a long-term insurance against infirmity or accidents than as shortterm investments.
- Q&M has been very successful in using premium-priced shares as its acquisition currency and tightly locking up strategic shareholders that cuts its stock overhang to almost zero and tightened up the free float. Allied with long-tailed profit guarantees that provide earnings visibility, this potent mix has convinced the market to accord Q&M premium valuations of more than 40x FY16 P/E (up to 50x in recent past). We think ISEC can replicate Q&M, albeit in a more sustainable manner.
Swing Factors
Upside
- Closure of immediately-accretive M&A deals in regional markets such as Taiwan, Indonesia, Vietnam and Cambodia in 1H16.
- Sustained recovery of MYR.
- Lower operating costs after closure of Mount Elizabeth Novena clinic.
Downside
- MYR weakness against SGD beyond our 2016 assumption of 3.10.
Gregory Yap
Maybank Kim Eng
|
John Cheong CFA
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2016-01-25
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