Singapore Medical Group Ltd (SMG SP) - DBS Research 2018-03-02: Driving Next Phase Of Growth

Singapore Medical Group Ltd (SMG SP) - DBS Vickers 2018-03-02: Driving Next Phase Of Growth SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group Ltd (SMG SP) - Driving Next Phase Of Growth

  • Contributions from acquisitions and improving diagnostic business continue to drive earnings in 2H17.
  • Singapore Medical Group (SMG) announces acquisition of SW1, one of the largest aesthetic, plastic surgery and medical spa clinics in Singapore.
  • Separately, Singapore Medical Group proposes a 1-for-20 rights issue at S$0.48 per share to raise up to S$10.8m to support growth trajectory.
  • Maintain BUY, Target Price of S$0.73 on organic and inorganic growth opportunities.

What’s New 

Contributions from acquisitions and improving diagnostic business continue to drive earnings in 2H17. 

  • While FY17 results came in lower than our expectations due to one-off costs as well as lower-than-expected health segment margins (at 38% vs our expectations of improvement to 42%), the contribution of earnings from three paediatric clinics in 2H17 and improving diagnostic business continued to help drive earnings in 2H17. 
  • On a full-year basis, Singapore Medical Group’s revenue grew 63.5% y-o-y to S$68.0m while net profit grew 250.8% y-o-y to S$8.5m on the back of improving margins as Singapore Medical Group consolidates the various businesses post acquisitions.

Margin improvements across the board. 

  • For the full year, the Health segment revenue grew 68.9% y-o-y to S$50.5m with gross margin improving from 30% to 38% with the completion of acquisition of O&G and paediatric clinics which yield higher margins.
  • Notably, post the acquisition of Lifescan Imaging and several loss-making entities, Singapore Medical Group continues to see strong growth for its Diagnostics & Aesthetics segment, with revenues growing 52.1% y-o-y to S$17.1m and gross margins increasing from 50.4% to 55.5% with the recruitment of a fourth radiologist. 
  • We believe there is further room for the diagnostic business to grow as the 5,500-sq ft diagnostics centre at Novena Medical Hub starts to ramp up its utilisation post its opening in January 2018.

Vietnam and Ciputra entities see better performance.

  • According to management, the Vietnam clinics had started to turn profitable at the operational level in 4Q17. Singapore Medical Group’s Ciputra eye clinic JV in Jakarta also turned profitable in 2H17. 
  • We expect narrowing losses from the overseas investments going forward as Singapore Medical Group continues to spearhead growth initiatives in both Vietnam and Jakarta.

SMG proposes a 1-for-20 rights issue at S$0.48 per share.

  • Separately, Singapore Medical Group has also announced its proposal for a 1-for-20 rights issue (ie.1 renounceable non-underwritten rights issue for every 20 shares held) to raise up to S$10.8m. 
  • Singapore Medical Group has plans to use 70% of the proceeds for further M&A activities and 30% for organic growth initiatives. This marks Singapore Medical Group’s third rights issue since February 2014 and represents a discount of c. 14% to its last traded price of S$0.56.
  • Several main shareholders, including the CEO (Dr Beng), Non-Executive Chairman (Mr Tony Tan), Executive Director (Dr Wong Seng Weng) and a Mr Ho Choon Hou – collectively holding c.38.69% of total shares, have provided their irrevocable undertakings to subscribe to the rights issue.

Landing another acquisition for S$6.5m: SW1, one of the largest aesthetic, plastic surgery and medical spa clinics in Singapore. 

  • Singapore Medical Group is acquiring an 85% stake in SW1, one of the largest aesthetic, plastic surgery and medical spa establishments in Singapore, founded by the team behind The Sloane Clinic, for S$6.5m. 
  • Of the S$6.5m consideration, S$3.5m will be funded via issuing new shares at S$0.578 per share and the remaining S$3.0m will be paid out in cash via three equal tranches - upon date of completion of the transaction, and its first and second anniversary.
  • SW1 is operating out of Paragon in its new 7,000-sqft aesthetic centre, with a team of five aesthetic practitioners and one plastic surgeon, with the founders/ vendors (Dr Kenneth Lee and Dr Low Chai Ling) entering into a consultancy agreement for a minimum term of five years.
  • We note that the share issuance represents a 2.5% premium to SMG’s last traded share price. Unlike past acquisitions, no financial details have been disclosed as yet given SW1 is a relatively new start-up. That said, management believes the potential profit contribution could range from S$1-2m.
  • According to management, there are further plans to scale SW1’s businesses regionally in Southeast Asia, particularly in Vietnam and Indonesia.


In Vitro Fertilisation (IVF) – targeting Australia and Vietnam for growth. 

  • In January 2018, Singapore Medical Group also entered into a consortium Joint Venture with CHA Medical Group (CHASMG JV) where Singapore Medical Group owns a 20% stake. The CHA-SMG JV is acquiring a 65% stake in City Fertility Centre (CFC), the fourth largest IVF clinic in Australia. Accordingly, CFC has > 10% market share in Queensland, Victoria and South Australia. 
  • From our understanding, the intention is to tap on CHA’s reputation and IVF technologies and CFC’s networks in Australia to expand the IVF business in Australia. Further, management has identified Vietnam as the market to which CHA-SMG JV will be keen to bring the IVF technologies.

Extending the women’s and children's specialisation; new specialist doctors on board. 

  • Singapore Medical Group (SMG) continues to grow its O&G business with the opening of Astra Laparoscopic & Robotic Centre for Women and Fertility and a senior O&G consultant will join SMG in March 2018. With this, SMG will have ten O&G doctors going forward. 
  • Separately, a new paediatrician joined SMG in January 2018 and SMG intends to open a new clinic by April 2018.
  • We expect contributions from O&G and paediatrics to continue growing organically with the opening of new clinics in FY18. Inorganically, FY18 also represents the first year where Astra and the paediatric clinics will see a full financial year’s contribution to SMG.

Valuation and recommendation 

Factoring in rights issues and issuance of new shares for SW1 acquisition. 

  • We have factored in the new share issuance in relation to the acquisition of SW1 (6.055m shares), coupled with the proposed 1-for-20 rights issue, assuming full subscription. At this stage, given limited details, we have currently pencilled in a progressive ramp-up in net profit contribution from SW1 clinic of S$0.6m/S$1.2m in FY18F/ FY19F. 
  • Our profit forecasts remain as we dial back our margin assumptions for its Healthcare Business to 42%, from 45% previously, given the lower-than-expected pace of margin expansion seen for FY17.

Maintain BUY, Target Price revised slightly to S$0.73. 

  • We maintain our BUY recommendation with a revised Target Price of S$0.73, factoring in the potential new shares (rights issue and new shares for acquisition), but roll our valuations over to FY19F.
  • We project a robust net profit growth of 53% for FY18F, before tapering down to 8% in FY19F. That said, we still project FY17-19F net profit CAGR of 29%, implying a PEG of < 0.7x. 
  • We have not factored in potential acquisitions arising from the proceeds of the proposed rights issue, which could help spur growth in FY19F.

Andy SIM CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-03-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.73 Down 0.750