Singapore Medical Group - RHB Invest 2016-08-11: Potential Multi Bagger Turnaround Healthcare Gem

SGinvestors.io

SINGAPORE MEDICAL GROUP LTD 5OT.SI 

Singapore Medical Group - Potential Multi Bagger Turnaround Healthcare Gem

• We initiate coverage on Singapore Medical Group (SMG), a specialist healthcare provider with significant expected NPAT FY16F-18F CAGR of 68% with a BUY and a DCF-derived SGD0.45 TP (67% upside). 
• With its turnaround now concrete, its prospects ahead are bright, driven by:
  1. Change in doctors’ remuneration, higher operational efficiencies and a patient load that will continue to boost its utilisation rate and margins;
  2. Contributions from and the expansion of its new diagnostics business;
  3. M&As of private clinics trading at lower multiples are also a possibility.

Robust FY16F-18F NPAT CAGR of 68%. 

• SMG’S stellar 1H16 results indicate that its turnaround is likely concrete and it may continue, driven by:
  1. Higher operational efficiencies and a patient load that could continue to lift its utilisation rate and margins;
  2. The change in doctors remuneration to a more variable component, based on clinic revenue, attracted more top notch specialists and increased the retention rate of revenue-generating performing specialists.
  3. SMG plans to continue to market on social media platforms and other avenues to attract the right clientele in order to boost the patient load and further improve utilisation rates and margins;
  4. Contributions from its new diagnostics business.

New diagnostics business has tremendous potential. 

• SMG’s management sees great potential and synergies in the imaging diagnostics business and has made a few acquisitions in this sector. Currently, it has three diagnostics centres in Paragon and Novena; it will likely continue to invest more on this segment, possibly with new acquisitions and by adding CT/MRI machines to increase its current capacity currently of 75-80%. 
• We expect this segment to grow by 20-30% pa over the next few years.

Potential M&As ahead. 

• We think that besides organic growth, SMG may begin to acquire private clinics either in existing medical fields or even new medical areas. 
• We believe that management will be prudent in making future acquisitions, and will likely only pay below 10x P/E for any future potential acquisitions, unless there are special circumstances which can be justified.

Initiate coverage with a BUY and a DCF-backed TP of SGD0.45 (TG: 2%, WACC: 7.5%). 

• SMG, a specialist healthcare provider on a turnaround is currently trading at an undemanding 22x FY17F P/E, ie at a deep discount of 38%/44% to its local/foreign peers. 
• Our TP of SGD0.45 implies 32x FY17F P/E.

Key risks. 

• Ability to attract and retain doctors and specialists, execution risks. 

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-11

RHB Invest SGX Stock Analyst Report BUY Initiate BUY 0.45 Same 0.45