Singapore O&G (SOG SP) - UOB Kay Hian 2017-04-17: Keep Your Eyes Peeled For Paediatrics

SINGAPORE O&G LTD. 41X.SI

Singapore O&G (SOG SP) - Keep Your Eyes Peeled For Paediatrics

With the recent incorporation of the paediatrics subsidiary, we expect paediatrics service to commence in 2H17, via either organic expansion or a potential acquisition. We view the move positively as paediatrics is a complementary vertical offering to SOG’s value chain, supported by a strong and growing O&G pillar.

Meanwhile, the dermatology and cancer segment continues to register good performance and will likely see stronger momentum in 2017.
Maintain BUY with a higher PE-based target price of S$1.53 (previously S$1.48).

SOG recently announced the incorporation of a new paediatrics subsidiary, SOG Children (Paediatrics), whose principal activities include provision of general paediatrics and adolescent medicine services. We anticipate the service to commence in 2H17.

We believe the set-up of the new division could be via organic expansion by recruitment or inorganic expansion through an acquisition.
We view the expansion into paediatrics positively as it serves as a complementary and synergistic vertical offering to the group’s value chain, allowing for cross-selling and referrals.

Furthermore, SOG has a strong O&G pillar to feed patient referrals to paediatrics. As an indication, in 2016, while 600 fewer babies were born in Singapore than in the previous year, SOG was still able to record a 5.8% increase in deliveries to 1,728 babies. This brings SOG’s market share in the private sector to 7.5% in 2016 (2015: 6.7%, 2014: 5.6%).
While Dr Heng continued to take up a sizeable amount of the delivery pool (which we estimate to be c.43-44%), we are seeing more diversification in deliveries amongst doctors. For instance, Dr Natalie Chua has been ramping up her delivery load, which we estimate to constitute c.16-17% of total deliveries.

In our opinion, birth rate in Singapore is well supported by pro-birth initiatives undertaken by the government. A good example will be the cash incentives offer of up to S$18,000 for parents with five children or more, on top of a generous 4-month/2-week maternity/paternity leave entitlement.
Furthermore, the Ministry of Manpower has introduced two funding schemes – WoW! And Flexi-Works! Funds to encourage companies to implement work-life balance strategies at their workplace.

The cancer segment broke even in 2016.
Over the same period, the segment registered a stellar 78% and 72% increase in patient load (2016: 1,781 patients) as well as surgical workload (2016: 292 surgeries) respectively. With Dr Lim (who joined in May 16) anticipated to potentially break even by this year, we expect growth to accelerate and contribute more substantially to earnings in 2017.
As of latest 2016 data, the cancer segment was contributing 3.7% to the group’s operating profit.

We remained positive on the dermatology segment, after the strong showing in 2016, where net earnings of S$2.6m exceeded the full-year net profit agreement (S$2.5m). Within just a year of operation, the dermatology segment has already contributed 28.6% to the group operating profit as of latest 2016 data.
Going forward, we believe margins for the dermatology segment will be maintained at the range of 30-31%. Having said that, we are optimistic of potential margin expansion as SOG further ramps up efforts on product development.
Meanwhile, we believe a new aesthetician could possibly come on board by 2H17, and a satellite aesthetic clinic could be set up to increase market share and leverage on Dr Joyce Lim’s reputation and branding.

Maintain a 3-year 2017-19F EPS CAGR of 20%, but we see an upside in earnings from expansion into paediatrics via either accretive M&A or recruitment.
Key risks include:
1. regulations and licensing requirements for its operations,
2. its ability to obtain the requisite approvals, licenses 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$1.53, based on higher 2017F peers’ PE of 31.8x (previously 30.7x).

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-17

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.53 Up 1.480