Singapore Medical Group (SMG SP) - Maybank Kim Eng 2017-04-21: Second Major Acquisition, Raise TP by 16%

SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group (SMG SP) - Second Major Acquisition, Raise TP by 16%

SMG is acquiring two paediatric clinics in Toa Payoh and Bishan, for SGD25.3m: 55% in cash and 45% in new shares at 0.54 cts apiece.
Valuation is 11x P/E, with a 5-year profit guarantee of SGD2.3m pa. They are expected to provide synergies and cross-selling opportunities for its women’s health division, which has eight specialists.

We remain positive on SMG’s ability to attract senior specialists, after its first major acquisition of Astra in Feb 2017.
We raise FY17-19E EPS by 5-16%, assuming six months of contribution in FY17E. Our TP climbs by 16% to SGD0.78, still at 27x FY18E EPS, the 2-year forward mean of small-cap healthcare peers in Singapore.
Further catalysts are expected from more M&As and organic expansion.
Risks to our view include failure in integrating M&A targets and competition.

This acquisition will give SMG a specialisation that complements its fast-growing obstetrics & gynaecology (O&G) practice, which has eight doctors.
The two practices are expected to enlarge its client base from women to babies and children. They are located in prominent heartlands, led by experienced doctors: Dr Heng Siok Kheng with 19 years of experience and Dr Oh Meng Choo with 29. Both will serve six years and are committed to identifying and mentoring talented paediatricians. Organically, SMG will employ two more O&G specialists in the near term.

Management continues to improve its existing operations. Ventures in Indonesia and Vietnam are seeing better patient demand and cost discipline.
Operating losses in Indonesia are narrowing and breakeven is expected in FY17.
Separately, SMG will be raising its stake in its cancer clinic to 90% from 80%, for SGD2.9m. It will issue 5.4m new shares at SGD0.54 apiece for this. The move is expected to raise its earnings by SGD0.3m and FY18E EPS by 2%.

Increasing discovery could re-rate the stock. A longer-term scenario incorporating 33x industry leader’s P/E in FY19E EPS suggests 61% upside to a TP of SGD0.95.
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/ 2017-04-21

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