Singapore O&G (SOG SP) - UOB Kay Hian 2017-02-17: 2016 Solid Earnings, Broadly In Line With Expectation

SINGAPORE O&G LTD. 41X.SI

Singapore O&G (SOG SP) - 2016 Solid Earnings; Broadly In Line With Expectation

Singapore O&G (SOG) reported a strong set of earnings (+64.8% yoy), where on an adjusted basis, 2016 earnings were broadly in line with our estimate.
Earnings were supported by strong revenue contribution from the new dermatology segment as well as increased patient loads across the O&G and cancer-related segments.

Given that the group is debt free and highly cash generative, we see potential for its valuation to expand should there be more accretive acquisitions.
Maintain BUY and raise PE-based target price to S$1.48.

For 2016, Singapore O&G (SOG) recorded a net profit of S$8.8m, which represents a stellar 64.8% yoy increase from 2015. However, earnings were impacted by a non-cash finance expense of S$0.5m relating to the unwinding of the implicit discount in the second and third cash tranche considerations for the acquisition of Dr Joyce Lim’s practice.
Adjusting for this non-cash finance expense, net profit after tax of S$9.3m would have been broadly in line with our estimate (representing 94% of our full year estimates).
The group declared a final interim dividend of 1.57 S cents. Its total DPS of 3.10 S cents represent a payout of 80%, on an adjusted EPS basis.

2016 revenue increased 74.7% yoy, largely due to revenue contribution of S$8.5m from the new dermatology segment, as well as increase patient loads across the obstetrics and gynaecology (O&G) and cancer-related segments.
However, earnings were also impacted by higher consumables and medical supplies used, which increased 135% yoy to S$4.4m in terms of value for 2016. This was largely attributable to more consumables and medical supplies used in the dermatology clinic, which totaled S$2.0m.

The dermatology segment performed well in 2016, where net earnings of S$2.6m exceeded the full-year net profit agreement of S$2.5m marginally. Earnings were supported by strong revenue contribution of S$8.5m in 2016, where dermatological products continued to be the main growth driver (about 50% of segmental revenue).
Joyce Lim’s business recorded a net margin of 30.4%, which is in line with our estimate of 28-33%.
Going forward, believe net margin for dermatology is likely to be maintained at 30%, with potential for further improvement as SOG further ramps up efforts on product development. We are also expecting a new aesthetician to come onboard by 2H17.

On an industry level, 600 fewer babies were born in Singapore in 2016 than in the previous year.
Nevertheless, SOG was able to record a 5.8% increase in deliveries for 2016 to 1,728 babies, increasing its market share in the private sector from 6.7% in 2015 to 7.5% in 2016.
Like in 2015, Dr Heng continued to take up a sizeable amount of the delivery pool. Nevertheless, we are also seeing Dr Natalie Chua picking up pace in the number of deliveries.

SOG’s three cancer specialists, Dr Cindy, Dr Radhika as well as Dr Lim Siew Kuan in aggregate, contributed S$2.8m to segmental revenue (from S$1.5m in 2015) in 2016. The cancer segment has also contributed positively to the group’s net earnings, recording a net profit margin of S$0.4m, as opposed to an operating loss in 2015.

Given that the group is debt free and highly cash generative due to low capex, we believe a M&A strategy and expansion plans could be in order.
We believe the group is likely to expand into complementary offerings for paediatrics this year, which would bring SOG one step closer to becoming a full-service women and children’s health business.

Introduce 2019 earnings forecast; trim 2017-18 earnings forecasts by 5-6% to account for more consumables and medical supplies used in the dermatological segment.
Key risks include:
1. regulations and licensing requirements for its operations,
2. its ability to obtain the requisite approvals, licences and/or 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.

Given the group is debt free and highly cash generative, we see potential for its valuation to expand should there be more accretive acquisitions.
In our view, SOG is a compelling healthcare stock with an attractive combination of growth in dividend yield and a 3-year EPS CAGR of 20%.
Maintain BUY with a higher target price of S$1.48, based on higher 2017F peers’ PE of 30.7x (previously 28x).

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-17

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.480 Up 1.430