Talkmed Group Ltd - CIMB Research 2017-04-26: No Surprises In 1Q17

Talkmed Group Ltd - CIMB Research 2017-04-26: No surprises in 1Q17 TALKMED GROUP LIMITED 5G3.SI

Talkmed Group Ltd - No surprises in 1Q17

  • 1Q17 core net profit was in line at 22% of our and consensus’ full-year forecasts.
  • Associate loss from HKIOC has continued to narrow. 1Q17’s share of associate loss was S$0.55m (4Q16: S$0.8m; 1Q16:S$0.7m).
  • TKMED’s net cash position continues to rise. 1Q17’s net cash was S$72.6m (4Q16: S$64m; 3Q16: S$51.2m).
  • We believe TKMED remains a stable healthcare play, buoyed by long-term demand for oncology specialist services.
  • Downgrade to Hold with an unchanged TP of S$1.83 (DCF-derived, WACC: 7.10%).

1Q17 earnings in line with expectations 

  • TKMED reported a 1Q17 revenue of S$16.2m, up 1.4% yoy, on the back of increased demand from patients and revenue from stem cells processing and culturing services.
  • Employee expenses grew 5.7% yoy due to higher staff costs and bonuses. Share of loss of associates fell to S$0.5m, down 23% yoy. The 1-for-1 bonus issue proposed on 22 Feb 17 goes ex on 28 Apr 17 and the bonus shares will be credited on 9 May 17.

Cash build-up becoming obvious 

  • The company ended 4Q16 with a net cash of S$64.0m and zero borrowings. As at end- 1Q17, net cash (still zero borrowings) has risen to S$72.6m. Cash formed 91% of its current assets in 1Q17. 
  • The company generated S$8.6m in operating cashflow in 1Q17 with zero capex requirements. 
  • The business needs no inventory 

Associate losses reducing 

  • In Jun 2015, TKMED acquired a 30% stake in Hong Kong Integrated Oncology Centre Holdings Limited (HKIOC), an integrated oncology specialist that offers both diagnostic and treatment services in Hong Kong. 
  • Patient visits have been encouraging, thanks to publicity efforts, but HKIOC remains loss-making due to high fixed costs (e.g. rental).
  • TKMED’s share of associate loss in 1Q17 was S$0.5m, down 23% yoy.

Rerating catalysts and risks 

  • Potential rerating catalysts include faster-than-expected turnaround of its associate.
  • Given the cash build-up and rerating of its share price, accretive M&As (a strategy stated in its IPO prospectus) could drive higher growth. If no suitable M&A targets can be identified, special dividends would be the usual consideration. 
  • Key risks are the company’s high dependence on its CEO and founder Dr Ang and a negative outcome of Dr Ang’s appeal against the Singapore Medical Council (in the Singapore High Court).

Downgrade to Hold from Add 

  • Our forecasts are unchanged. 
  • We opine that the recent share price rerating has priced in the optimism of a reduction in associate loss and management’s efforts to improve liquidity via the 1-for-1 bonus issue; hence our downgrade to Hold from Add with an unchanged target price of S$1.83 (DCF derived, WACC 7.10%). 
  • Further rerating would have to come from higher profit growth, which would have to be inorganic, in our view.

William TNG CFA CIMB Research | 2017-04-26
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.830 Same 1.830