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%).

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.

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

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.

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).

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 | http://research.itradecimb.com/ 2017-04-26

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.830 Same 1.830