Singapore O&G - DBS Research 2017-11-09: Awaiting Delivery

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SINGAPORE O&G LTD. 1D8.SI

Singapore O&G - Awaiting Delivery

• Singapore O&G (SOG)'s 9M17 results remained lackluster despite better q-o-q 3Q17 results.
• Key positives: continues to gain market share despite lower babies delivered y-o-y.
• Key negatives: lower EBIT margins y-o-y.
• Upgrade to HOLD; raised TP to S$0.52.

Upgrade to HOLD rating, raised TP to S$0.52. 

• We upgrade our rating to HOLD and raised TP to S$0.52 (from S$0.41). Despite weak 9M17 earnings, we believe the market has priced in expectations of a soft FY17F earnings performance for Singapore O&G (SOG). 
• Looking forward, we estimate a stronger growth of 14%-16% in FY18F-FY19F led by organic growth with contributions from the ramp-up in cancer and paediatrics divisions, contributions from its new fertility division and recovery in O&G and dermatology, as well as inorganic growth from potential M&As given that SOG has been inactive in the M&A space for a while.

Where we differ. Potential upside from M&A priced in for now.

• Despite our cautiously optimistic view on potential upside SOG could draw from potential acquisitions/M&A, we believe at the current valuation of 26x FY18F PE, the market has priced in potential inorganic growth.

Potential Catalysts: 

• Acquisitions / M&A, faster-than-expected ramp up in paediatrics and new fertility services, recovery in O&G and dermatology.

Improvements q-o-q but 9M17 remains lacklustre. 

• 9M17 net profit fell 5% y-o-y to S$6.5m; 72% of our FY17F estimates.
• Despite q-o-q improvement in 3Q17 (revenue +6% q-o-q; net profit +10% q-o-q), the lower 9M17 y-o-y earnings were largely impacted by a weak 1H17, dragged by O&G (1H17 operating profit -2% y-o-y) and dermatology (-19% y-o-y) divisions. 
• 9M17 market share in O&G improved to 7.8% vs 7.3% in 9M16.

Valuation

• Our target price of S$0.52 is based on PE valuation methodology, pegged to 25x PE (close to its average) on FY18F earnings.

Key Risks to Our View

• Key risks that could derail our thesis include

1. absence of acquisitions / M&A,
2. existing businesses remain lacklustre, and
3. lower-than-expected take-up of new fertility services.

WHAT’S NEW - Waiting for delivery 

Despite q-o-q improvements in 3Q17 results; 9M17 results were dragged down by weak 1H17. 

• Singapore O&G (SOG)’s 9M17 net profit fell 5% y-o-y to S$6.5m; 72% of our FY17F estimates. Despite q-o-q improvements in 3Q17 (revenue +6% q-o-q; net profit +10% q-o-q), the lower 9M17 y-o-y earnings were largely impacted by a weak 1H17 dragged by O&G (1H17 operating profit -2% y-o-y) and dermatology (-19% y-o-y) divisions.
• 3Q17 earnings fell 3.3% y-o-y to S$2.3m despite higher revenue (+2%), mainly due to higher tax expenses provided (+25% y-o-y).
• 9M17 EBIT margin fell 1.6ppts to 36.5%. largely due to lower margins recorded by O&G (50% vs 53% in 9M16) and start-up losses of c.S$0.1m from paediatrics division, offset by improved margins from cancer division (24% vs 15% in 9M16). Management disclosed that O&G division was impacted by lower intensity gynaecology cases.

O&G division: babies delivered fell 2% y-oy to 1,237 births in 9M17; market share improved to 7.8%. 

• SOG delivered less number of babies, -2% y-o-y to 1,237 babies in 9M17, impacted by lower total number of births delivered (-5% y-o-y) and lower number of births delivered in the private sector (- 10% y-o-y; share of births in the private sector fell to 54% vs 56% in 9M16). However, SOG continues to gain market share in the private sector (7.8% vs 7.3% in 9M16).
• The number of babies delivered was 443 babies in 3Q17, a recovery from the low of 390 babies in 2Q17. In 3Q17, SOG recorded highest market share per quarter of 8.3% 

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

• Revenue from the cancer division saw strong growth of 31% y-o-y, albeit still small at only 12% contribution to the group’s revenue. Profitability (EBIT margin) improved to 24% in 9M17 vs 15% in 9M16 and hit a high of 33% margin in 3Q17. 
• Management remains optimistic on the ramp-up of the cancer division.

Dermatology division: 

• Despite improvements in 3Q17, 9M17 results remained weak with revenue down 9% and operating profit falling 7% y-o-y. 
• 3Q17 margins fell marginally by 3 bps to 37%. Management plans to hire a 2nd dermatologist / aesthetician in 2018 to expand its dermatology division.

Paediatrics division: 

• SOG’s first pediatrician, Dr Lim Xue Yan has been working in collaboration with Dr Heng and Dr Natalie Chua. Management believes she could likely be profitable after 1 year, from 2H18 onwards. 
• Management expects to open a second pediatrics clinic at Tiong Bahru by end of this month (Nov17). It expects to potentially hire another one more in 2018. With the pipeline of new doctors potentially joining, we expect some significant contributions from the paediatrics division from 2H18.

Fertility division to start in 1Q18: 

• In Oct17, SOG signed a collaboration with KL Fertility & Gynaecology Centre (KLFGC), a wholly owned subsidiary of Monash IVF Group, Australia to provide fertility services. Management expects to start in 1Q18.
• If successful, this expands the range of services that SOG can offer its patients, and draws 2 key benefits;
  1. widen its target market and
  2. positive spillover to its existing O&G business if pregnancy is successful post fertility treatment, at very little additional cost to SOG. 
• However, the key is the development of awareness and reputation of the reliability and success rate of assisted reproductive technology (ART) services provided by both SOG and KLFGC, and the receptiveness of this concept.
• We believe near-term earnings impact would be minimal but there could be medium-to-long term growth potential if the collaboration succeeds.

Upgrade to HOLD; raised TP to S$0.52. 

• We upgrade our rating to HOLD and raised TP to S$0.52 (from S$0.41) on a higher PE multiple, based on its average PE of 25x (previously 20x) on FY18F earnings.
• Following its weak YTD earnings performance, we lowered our FY17F earnings estimates by 5%. Despite the adjustment, we believe the market has priced this in and expects FY17F earnings performance to be soft.
• Looking forward, we estimate a stronger growth of 14%-16% in FY18F-FY19F, largely led by organic growth with contributions from the ramp-up in cancer and paediatrics divisions, contributions from its new fertility division and recovery in O&G and dermatology, as well as inorganic growth from potential M&As given that SOG has been inactive in the M&A space for a while 
• As such, we raised our target PE multiple, pegging it at 25x, close to its average to reflect a better growth profile especially with potential inorganic growth.
• Key potential risks to our call are
  1. absence of potential acquisitions / M&A,
  2. existing businesses remain lacklustre, and
  3. lower-than-expected take-up of new fertility services.

Rachel TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-09

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