Singapore Medical Group Ltd - DBS Research 2016-10-20: Fast tracking growth via M&A

Singapore Medical Group Ltd - DBS Research 2016-10-20: Fast tracking growth via M&A SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group Ltd - Fast tracking growth via M&A

  • Private healthcare specialist turns profitable in 2016.
  • FY17F earnings to be propelled by recent string of value-accretive acquisitions.
  • Ambitions to duplicate existing verticals abroad could further accelerate growth.
  • Fair value of S$0.54, based on 30x FY17F PE.

The Business 

Private healthcare specialist slated for 2016 turnaround.

  • Singapore Medical Group (SMG) is chain of specialist clinics and provider of diagnostic health screening services, based primarily in Singapore. The group’s late-2013 restructuring efforts are starting to bear fruit as SMG is set to deliver a stronger second half – marking its return to profitability in 2016. 
  • Beyond 2016, organic growth could be achieved as complementary medical specialties and services are introduced, new clinics are launched, and as current businesses progressively mature.

FY17F earnings are propelled by recently announced acquisitions – Lifescan Imaging and Astra Women’s Specialist. 

  • SMG completed the acquisition of the remaining 61.9% stake in former associate, Lifescan Imaging (which generated profits of S$0.56m in 1H16) in Sep 2016, and recently announced the proposed acquisition of a chain of obstetrics & gynaecology clinics, Astra Women’s Specialists, which comes with a 6-year service agreement and 5- year profit guarantee of S$4.615m per year.
  • Based on our estimates, the acquisitions will effectively triple our FY17F earnings to S$7.3m.

The Stock 

Fair value of S$0.54 based on 30x FY17F PE. 

  • With increasing profitability from SMG’s current businesses, and with near-term earnings outlook propelled by earnings-accretive acquisitions, we believe a 30x FY17F PE valuation, pegged to peers’ average, is fair.
  • This implies a fair value of S$0.54, and potential upside of 21% from the current price.

Key Risks 

Retention of doctors is key. 

  • While we are near-term positive on the group’s proposed acquisition of Astra Women’s Specialist, we believe a key risk to medium-term profitability lies in SMG’s ability to motivate and retain doctors after the profit guarantees and service agreements expire in FY22F and FY23F, respectively. 
  • Other risks include the risk of sector de-rating and risks inherent in future acquisitions.

Return *: 2
Risk: High
Potential Target 12-mth*: S$ 0.54

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-20
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.54 Same 0.54

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.