Singapore O & G - DBS Research 2017-08-11: Under The Weather

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SINGAPORE O&G LTD. 1D8.SI

Singapore O & G - Under The Weather

• 1H17 net profit fell 6% y-o-y to S$4m; below expectations, downgrade to FV and TP: S$0.41.
• Lower earnings due to dermatology and O&G divisions.
• Strong growth momentum in cancer division, albeit small.
• Declared 0.61 Scents interim dividend.

Downgrade to FULLY VALUED rating, lower TP to S$0.41. 

• We downgrade our rating to FULLY VALUED on a lower TP of S$0.41 (from S$0.80). 
• While we remain positive on SOG’s medium-term growth potential from potential expansion into another new pillar, we are cautious on the near-term potential headwinds on organic growth following the lower earnings recorded in 1H17 and potential increase in cost from the gestation period in ramping-up paediatrics division.

Weak 1H17 results. 

• 1H17 net profit fell 6% y-o-y to S$4m; 40% of our FY17 estimates. The lower earnings were impacted by muted revenue growth of only 2% y-o-y to S$14m led by lower revenue from dermatology division (-9% y-o-y) while O&G division recorded modest growth (+3% vs +17% y-o-y in 1H16), coupled with higher expenses (+8% y-o-y) mainly from higher staff cost. 
• Key positives from the results:
  1. improvement in market share of births on a weak national number, and
  2. positive growth momentum in cancer division. 
• Key negatives:
  1. contributions from dermatology fell, and
  2. EBIT margin deteriorated.

Expanding into higher-margin complementary specialised services could be potential re-rating catalysts. 

• Key potential upside risks and re-rating catalysts are:
  1. better-than-expected ramp-up from its cancer and paediatrics divisions,
  2. recovery in the dermatology division, and
  3. expansion into a potential new growth pillar including IVF, child care and imaging.

Valuation

• Our target price of S$0.41 is based on PE valuation methodology pegged to 20x PE (based on 1 standard deviation below historical average) on the average FY17F/FY18F earnings. 

Key Risks to Our View: 

• Key risks that could derail our thesis include
  1. better-than-expected ramp-up from its cancer and paediatrics divisions,
  2. recovery in the dermatology division, and
  3. expansion into a potential new growth pillar.

WHAT’S NEW

Under the weather. 1H17 results impacted by lower contributions from dermatology and O&G. 

• Singapore O&G (SOG)’s 1H17 net profit fell 6% y-o-y to S$4m; 40% of our FY17 estimates. 
• The lower earnings were impacted by muted revenue growth of only 2% y-o-y to S$14m led by lower revenue from dermatology division (-9% y-o-y) and O&G division recorded modest growth (+3% vs +17% y-o-y in 1H16), coupled with higher expenses (+8% y-o-y) mainly from higher staff cost partially from new hires and change in accounting treatment to accrue bonuses for its specialist medical practitioners every quarter and higher depreciation (+44% y-o-y) from purchases of new laser machine for dermatology and new ultrasound machines for new O&G doctors.
• 2Q17 earnings fell 14% y-o-y to S$2m impacted by lower revenue (-1%) mainly from the dermatology division (-9%) and higher expenses (+5%) mainly from higher staff cost (+5%) and higher depreciation (+34%).

Declared interim dividend of 0.61 Scents (70% payout). 

• SOG declared an interim dividend of 0.61 Scents (70% payout ratio) vs 0.765 Scents 1H16 (based on similar payout ratio). The adjusted dividend (adjusted for accounting treatment of accrual bonuses) would have been 0.655 Scents.
• EBIT margin dropped 2.8ppts to 35.1%, largely due to lower margins from O&G division (-3ppts y-o-y) and dermatology division (-4% ppts). The lower margin recorded by the O&G division was partially impacted by an O&G doctor (Dr Hong Sze Ching) who was on maternity leave in 2Q17, lower number of births delivered by doctors with higher profitability and new doctor (Dr SK Lim) which has yet to breakeven. 
• The dermatology division was largely impacted by lower revenue on stable costs. In addition, the lower margin was led by 27% y-o-y lower government grants and higher depreciation (44%).

O&G division: 1H17 delivered 794 births (vs 801 births in 1H16); market share improved to 7.5%. 

• SOG delivered marginally less number of babies, -1% y-o-y to 794 babies in 1H17. However, SOG’s market share in the private sector improved to 7.5% vs 7% in 1H16 despite the percentage of births delivered in the private sector falling 7% y-o-y, and the share of births delivered in the private vs public sector dropping to 55% vs 58% in 1H16.
• Despite SOG delivering lower babies in 2Q17 - 390 babies vs 404 babies in 1Q17 and 433 in 2Q16 - its market share in the private sector improved to 7.7% from 7.4% in 1Q17 and 7.5% in 2Q16.
• The low number of births delivered in 2Q17 were partially due to an overall decline in the total number of babies delivered in 2Q17 (-8%y-o-y), making it the lowest figure recorded since 1Q2011. In addition, the private sector saw the largest decline in 2Q17 at -12.6% y-o-y with the private sector’s market share declining to 54% vs 59% in 2Q16. 
• Internally, management explained that a few doctors were away on leave in 2Q17.

Cancer division: Growth momentum picking-up and improvement in profitability. 

• Revenue from the cancer division saw strong growth at 34% y-o-y, albeit still small with only 12% contribution to the group’s revenue. Profitability (EBIT margin) has improved to 18% in 1H17 vs 13% in 1H16.
• Management remains optimistic on the ramp-up of the cancer division and plans to tap into overseas patients from countries such as China.

Dermatology division: Despite the strong FY16 results driven by the dermatology division, 1H17 results remained weak, partially impacted by lower foreign patients. 

• 1H17 revenue fell 9% y-o-y while operating profit fell 19% y-o-y.
• In 2Q17, revenue remained relatively flat q-o-q while operating profit increased 30% q-o-q. Hence, EBIT margin improved to 40% in 2Q17 vs 30% in 1Q17.
• Management plans to hire a 2nd dermatologist / aesthetician in 2018 to expand its dermatology division.

Paediatrics division: In July 17, SOG established a new pillar, paediatrics, with Dr Lim Xue Yan at Parkway East Medical Centre. 

• Management expects to ramp-up its paediatrics with a second paediatrician by Nov17 and potentially to hire another two more in 2018. Management expects a paediatrician to potentially turn profitable in less than 6 months. With the pipeline of new doctors potentially joining, we expect some significant contributions from the paediatrics division from 2H18.

Lower growth profile; Downgrade to FULLY VALUED with TP reduced to S$0.41. 

• On the back of a weak set of 2Q17 and 1H17 results, we reduced our FY17F to FY19F estimates by 14% to 23% by reducing our 3-yr revenue CAGR growth to 10% from 19% (largely from O&G and paediatrics) and EBIT margin by 1 to 2ppts. 
• Consequently, we downgrade our rating to FULLY VALUED (from BUY). We lower our TP to S$0.41 from S$0.80 based on PE valuation methodology pegged to 20x PE multiple on average FY17F/FY18F earnings. 
• We lower our target PE multiple from 30x to 20x (based on PE valuation at 1 standard deviation below historical average) to reflect a lower growth momentum.
• While SOG’s medium-term growth potential could pick up from potential expansion into another new pillar, we are cautious on the near-term potential headwinds on organic growth following the lower earnings recorded in 1H17 and potential increase in cost from the gestation period in ramping-up paediatrics and potential dermatology division.
• Key potential re-rating catalysts and upside risks to our call are 
  1. better-than-expected ramp-up from its cancer and paediatrics divisions,
  2. recovery from the dermatology division, and
  3. expansion into a potential new growth pillar including IVF, child care and imaging.

Rachel TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-11

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