Singapore O&G (SOG SP) - UOB Kay Hian 2016-09-06: In Excellent Health; Recent Share Pull-back Offers Entry Opportunity

SINGAPORE O&G LTD. 41X.SI

Singapore O&G (SOG SP) - In Excellent Health; Recent Share Pull-back Offers Entry Opportunity

Despite the recent Zika virus outbreak in Singapore, we believe the business of SOG remains intact on the back of the non-elective nature of obstetrics services and its diversified business model.
We foresee margin improvement from the ramp-up of new businesses (dermatology & cancer segments) and potential expansion plans.

BUY with a higher PE-based target price of S$1.43, based on peers’ 2017F PE of 27.9x (previously S$1.38).

While Zika is generally a mild disease, an infection during pregnancy may cause more serious complications such as birth defects in unborn children. With the outbreak quadrupling to over 200 cases in less than a month, we checked with Singapore O&G (SOG) to find out how the outbreak has impacted its obstetrics operations.
We understand that it is still business as usual at its clinics. This is not surprising as obstetric services are non-elective for expectant mothers, where regular check-ups are required throughout the gestation period of nine months.
We note that a possible impact could perhaps be a change in timing pattern of patient visits, which are now more concentrated in the afternoons, rather than in the mornings or evenings – when mosquitoes are believed to be more active.

We note that a prolonged outbreak of Zika could alter the pattern of family planning, which may impact SOG’s obstetric business in the longer term. For instance, health officials in certain countries such as Brazil and Ecuador have advised women to delay pregnancy for up to a year, while the World Health Organization (WHO) stated that the Zika disease is best prevented by delaying pregnancy. However, we reckon such a risk would be well managed, given SOG’s diversified business model.
We forecast obstetrics to contribute c.35% of the group’s overall revenue in 2016, compared with 54% in 2015, as the group continues to ramp up its non-obstetrics segments such as cancer and dermatology.
Furthermore, we believe a delay in pregnancy now would only translate to a subsequent return of births in the future.

The dermatology segment outperformed our expectation for 1H16, where it contributed S$1.5m of the group’s underlying net profit, accounting for 60% of the full-year net profit agreement of S$2.5m.
Earnings were largely boosted by dermatological products which currently contribute about 50% of segmental revenue. Procedures and consultation contribute 35% and 15% of segmental revenue respectively.
We believe there exists the potential for scalability and further margin improvement in 2H16 as SOG heightens its cross-selling efforts for Joyce Lim’s products in other clinics as well as potential product development initiatives.

The cancer segment has turned profitable since 1H16, now contributing 9% and 5% of total group revenue and earnings respectively. While earnings may have been dragged temporarily by the recent onboarding of new cancer specialist Dr Lim Siew Kuan, we expect growth to accelerate and contribute more substantially to earnings by 2017.

Given that the group is debt free and highly cash generative due to low capex, we believe an M&A strategy and regional expansion plans could be under consideration.
Meanwhile, we also see likelihood of the group’s expansion into the paediatric outfit in 2017, which would bring SOG one step closer to becoming a full service women and children’s health business.

We forecast SOG to deliver a 3-year EPS CAGR of 38%.
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 38%.
Maintain BUY with a target price of S$1.43, based on higher 2017F peer’s PE of 27.9x (previously 26.3x)

Thai Wei Ying UOB Kay Hian | Andrew ChowCFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-06

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.43 Up 1.38