Singapore Medical Group - RHB Invest 2017-02-17: Korean Strategic Investor To Boost War Chest

Singapore Medical Group - RHB Invest 2017-02-17: Korean Strategic Investor To Boost War Chest SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group - Korean Strategic Investor To Boost War Chest

  • Singapore Medical Group (SMG) secured a major strategic shareholder in leading Korean comprehensive healthcare provider, CHA Medical Group, which will invest SGD15m for a 7.1% stake in SMG. 
  • We believe this is a big positive for SMG, with several key strategic initiatives in Singapore, Vietnam and other key markets across SEA. This would also boost SMG’s war chest to fund future acquisitions, which we believe would likely happen going forward. 
  • We lower our TP to SGD0.59 (from SGD0.63, 11% upside) to account for dilution from the issue of new shares. BUY maintained.

Leading Korean healthcare player as strategic investor. 

  • Established in 1960, CHA Medical Group (CHA) opened its first obstetrics & gynaecology (O&G) practice in Seoul, South Korea, and has developed over the past six decades into one of Asia’s leading medical groups, encompassing the full healthcare spectrum from research and education, to hospital and clinical care.

Synergies in joint ventures. 

  • Singapore Medical Group (SMG) would be able to tap into CHA’s highly-regarded specialisations in O&G and reproductive medicine, for cross-border synergies with upcoming projects in Vietnam, Singapore and other key regional markets. This would also help anchor SMG’s position as a pan-Asian private healthcare specialist.

Boosting war chest for future acquisitions... 

  • SMG will issue 30m new ordinary shares to CHA at SGD0.50 via a private placement, which would raise up to SGD15m. This would provide SMG with additional funds, which would further build up its war chest to fund acquisitions down the road.

...to underpin growth at a faster pace. 

  • With this enlarged war chest, we believe it would likely be able to speed up its inorganic growth at a much faster pace, and we expect some of these acquisitions to come through in the near term. 
  • With its prudent management team, we believe SMG will likely only consider purchasing businesses that provide opportunities in Singapore and the SEA region, at P/Es below 15x. This would hasten its transformation into a pan- Asian private healthcare specialist, in our view.

Maintain BUY with lower DCF-derived TP of SGD0.59. 

  • We believe that this, combined with its foray into Vietnam, is in line with SMG’s regional expansion strategy and would be beneficial in the long run. 
  • With a turnaround now further validated by both organic and inorganic growth, we maintain our BUY recommendation on SMG. However, we lower our DCF-backed TP to SGD0.59 (implies 2017F P/E of 27x), to account for dilution from the issue of new shares. 
  • Note that our TP would likely be revised up for any earnings-accretive acquisitions that may occur in the near term.
  • Key risks include execution risk, and the inability to raise capital to fund acquisitions.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-02-17
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.59 Down 0.630