Singapore O&G - DBS Research 2016-08-12: Strong growth from all fronts

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SINGAPORE O&G LTD. 41X.SI

Singapore O&G - Strong growth from all fronts

• 1H16 net profit almost doubled to S$5.2m.
• Earnings from organic operations jumped 41% yo-y, new dermatology unit contributed 28% to earnings.
• EBIT margin expanded 2ppts; cancer unit turns profitable.

Maintain BUY rating, raised TP to S$1.50. 

• We maintain our buy rating and remain positive on Singapore O&G (SOG)’s growth prospects. Key potential catalysts are 
  1. better-than-expected growth from its cancer and dermatology divisions, 
  2. expansion into new specialisations such as paediatrics, and 
  3. better-than-expected improvement in margins.

Strong 1H16 results from all divisions. 

• 1H16 net profit almost doubled to S$5.2m (+91% y-o-y), from both forming 62% of streets’ FY16 estimates. The growth was partially contributed by the consolidation of Dr Joyce Lim’s dermatology medical practice and partially from strong organic growth (+41% y-oy).
• Key positives: 
  1. margins expanded 2 ppts, 
  2. increase in obstetrician & gynecology (O&G) division’s market share, and 
  3. cancer division has turned profitable.

Expanding into higher-margin complementary specialised services. 

• With the O&G business now achieving > 1,500 births per annum, management believes that O&G would be able to support a new paediatrics division. 
• Management hopes to start the new division in 2017, subject to successful recruitment of competent pediatricians. 
• Management continues to explore new expansion opportunities both in new specialisations and/or new markets. We believe other complementary services to explore include in-vitro fertilization (IVF).

High dividend payout. 

• SOG has a high dividend payout policy of 90%, to align the interests of its medical practitioners (who together own a 78% stake), offering dividend yields of 3-4%.

Valuation

• We increase our FY16F-FY18F earnings by 6%-11% by raising our EBIT margins and assuming higher contributions from its cancer division. 
• We raised our target price to S$1.50 (from S$1.05), based on the average of PE multiple (raised PE multiple to 30x at 15% discount to peer) and DCF valuation.

Key Risks to Our View

• Key risks that could derail our thesis includes 
  1. Execution risks due to lack of track record, 
  2. highly dependent on a few key doctors, and 
  3. low liquidity.

Rachel TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.50 Up 1.050