Singapore O&G - UOB Kay Hian 2016-06-14: Second-Trimester Check-Up ~ In Good Condition

SINGAPORE O&G LTD 41X.SI

Singapore O&G (SOG SP) - Second-Trimester Check-Up: In Good Condition

SOG is poised to benefit from pro-birth policies in Singapore as well as a diversified business model, which we believe will provide it resilience amid economic uncertainties.
In addition, we see potential earnings upside should there be accretive acquisitions or higher-than-expected earnings contribution from Dr Joyce Lim’s business.
Maintain BUY with a higher PE-based target price of S$1.01 (previously S$0.96).

This report highlights the key takeaways from our recent meeting with management.

Since 2011, the Singapore government has introduced several policies targeted at increasing the national birth rate, with some of the latest ones introduced in Budget 2016. These include the First Step Grant in which parents get S$3,000 upfront into their child’s Child Development Account, as well as the Fresh Start Housing Scheme, which provides a grant of up to S$35,000 for families with young children in rental housing.
Additionally, the obstetrics & gynaecology (O&G) sector has been positively supported by an upward trend in the number of births, from 39,654 in 2011 to 42,185 in 2015, where about 60% were delivered in private hospitals.
Reflecting this, Singapore O&G (SOG) recorded stable increases in the number of babies delivered over the past four years, growing its market share from 4.3% of the private delivery market in 2012 to 6.7% in 2015. We estimate SOG’s O&G revenue will continue to grow at a 3-year CAGR of 14%, and contribute to 60% of its total revenue in 2016.

Amid increasing uncertainties, there are concerns about the impact of declining live births on the O&G sector. Nevertheless, we believe such risk is well managed, given SOG’s steady ramp-up in non-O&G segments, such as cancer-related and dermatology, which generally also command higher margins.
We were encouraged by positive datapoints, which showed increasing contribution from non-O&G specialties (2015: 9.4% of total revenue, 2014: 0.7%). Furthermore, with the inclusion of its newly acquired dermatology business in Dec 15, we project non-O&G revenue to increase to 40% of total revenue in 2016.

Recall SOG acquired the business and medical practice of Dr Joyce Lim in Dec 15, with the newly consolidated practice now comprising aesthetic dermatological procedures, dermatological and laser surgery as well as general skincare.
We understand the consolidation of Dr Joyce’s business remains on track and could contribute net profit of S$2.5m in 2016. We also see potential upside from product development as well as cross selling from referrals.
Management is also looking to develop a team of aesthetic physicians under Dr Joyce Lim’s mentorship to increase market share.

Having grown from four medical practitioners in 2012 to eight in 2015, SOG continues to ramp up recruitment efforts by targeting to recruit at least two new doctors every year, with the latest addition being Dr Lim Siew Kuan, who has started practicing out of Mount Elizabeth Hospital Novena Specialist Centre in May 16. As the cancer business is only starting to ramp up, and with Dr Lim Siew Kuan just coming on board, we expect operating losses at the cancer segment to continue for the rest of 2016.
Nevertheless, we are of the view that Dr Lim is likely to follow in the same growth trajectory as Dr Cindy Pang, who turned profitable in less than a year.
Meanwhile, SOG has also recruited a new O&G doctor, who is expected to join in 2H16.

We believe SOG remains committed to expanding regionally through organic growth, joint ventures and acquisitions as well as expanding business offerings to adjacent fields such as paediatrics. The group is also looking to diversify and grow its business base to include more corporate clients and medical travellers.

We raise our 2016-18 earnings estimates by up to 2% to factor in higher pricing (c. 18- 25% increase) for Dr Heng’s and Dr Choo’s services.
Key risks include:
1. regulations and licensing requirements for its operations,
2. its ability to obtain the requisite approvals, licences and 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.

We see potential for valuation to expand if there are more accretive acquisitions or if contributions from the business of Joyce Lim exceed estimates, given the scalability of the business and its strong branding.
In our view, SOG is a compelling healthcare stock with an attractive combination of growth in dividend yield and 3-year EPS CAGR of 24%.
Maintain BUY with a higher target price of S$1.01 (previously S$0.96), based on 24.4x 2017F PE.

Thai Wei Ying UOB Kay Hian | Andrew Chow, CFA CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-14

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.01 Up 0.96