Singapore Medical Group (SMG SP) - Maybank Kim Eng 2017-02-17: Secured a reputable strategic shareholder

SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group (SMG SP) - Secured a reputable strategic shareholder

CHA Medical Group will be subscribing for 30m new shares in Singapore Medical Group (SMG) at SGD0.50/sh (c.6% discount to the last closing price).
Based in South Korea, CHA is one of Asia’s leading medical groups with operations in US and Japan. This positive tie-up will enable SMG to:
1. tap on CHA’s reputable obstetrics & gynaecology (O&G) specialisations;
2. pursue overseas expansion with an established international healthcare group; and
3. access to cash for expansion (67% of proceeds will be used for M&A, 20% for overseas).
Maintain BUY and TP of SGD0.59, based on a P/E of 27x FY17E EPS, the avg 2-yr fwd mean of small-cap healthcare peers in Singapore.
We maintain our EPS as dilution should be temporary, we expect the proceeds to be deployed quickly for EPS accretive expansion. If left idle, additional interest income could add c.1% to FY18 earnings.

SMG intends to use the proceeds from CHA to aggressively explore growth opportunities. 67% of the net proceeds will be used for M&A, 20% for expansion into other ASEAN countries and 13% to grow existing business.
Aside from capital contribution, CHA’s experience and comprehensive healthcare platform could help SMG to expand quicker and more efficiently. After the placement, SMG and CHA will jointly pursue strategic initiatives in Singapore, Vietnam and other key ASEAN markets.

The strategic stake will enable SMG to leverage on CHA’s expertise in the O&G field to enhance its women’s specialist division. CHA is widely recognised as Korea’s leading expert in infertility, women’s health and maternity care, with c.6,000 deliveries and c.12,000 IVF cases annually.
To recap, SMG has built up a sizeable operation with eight doctors in the O&G segment after the acquisition of Astra Women’s specialist group.

Along with the completion of Astra Women Specialist (81m shares), this strategic placement will increase SMG’s market cap to SGD224m (based on 422m shares at SGD0.53/sh) from SGD165m, previously.
As SMG’s market recognition and track record increase, it could re-rate closer to the market leader, Raffles Medical, which is trading at 33x FY17E P/E.

Increasing discovery could re-rate the stock. A longer-term scenario incorporating a 33x industry leader’s P/E in FY18E EPS suggests 102% upside to a TP of SGD0.92.
More M&A: we have not factored in any future acquisitions. Every SGD1m profit acquisition could raise FY7E EPS and TP by at least 7%.
Faster-than-expected earnings growth from existing businesses and newly-acquired entities.

Failure in integrating M&A targets. Acquisition of women’s health group is SMG’s largest acquisition and integrating the business might require more resources.
Failure to maintain profitability for recently turned around businesses, as SMG might overspend on expansions.
Competition from other integrated and specialised players. They could take away SMG’s patients and specialist doctors.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-17

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.590 Same 0.590