Singapore Medical Group (SMG SP) - UOB Kay Hian 2018-03-19: Short-term Pain, Long-term Gain

Singapore Medical Group (SMG SP) - UOB Kay Hian 2018-03-19: Short-term Pain, Long-term Gain SINGAPORE MEDICAL GROUP LTD 5OT.SI

Singapore Medical Group (SMG SP) - Short-term Pain, Long-term Gain

  • Singapore Medical Group (SMG) has made a big step into expanding its presence in the highly lucrative aesthetics business through the acquisition of SW1 in Singapore. 
  • SMG has also proposed a 1-for-20 rights issue. The stock is trading at 17.7x 2018F PE and at a 6.3% premium to the rights price. 
  • Maintain BUY with a lower target price of S$0.74 based on an enlarged share base and pegged to peer's average PE.



WHAT’S NEW


Rights issue to fund future M&A activities. 

  • Singapore Medical Group (SMG) has proposed a 1-for-20 renounceable non-underwritten rights issue to raise up to S$10.8m.
  • SMG has earmarked 70% of the proceeds for future M&A activities and the balance 30% for organic growth requirements. The main shareholders including CEO Dr Beng Teck Liang, Chairman Mr Tony Tan and Executive Director Dr Wong Seng Weng have provided irrevocable undertakings to subscribe to the rights issue. 
  • Even though the rights issue has been a drag on current share price, we view the proposal as a positive indication that management does not want to further dilute their stake in the company. Furthermore, this will provide the company S$7.6m to look out for attractive acquisition targets which should help fund SMG’s aggressive regional expansion.

Making headway in aesthetics with acquisition of SW1. 

  • SMG is acquiring an 85% stake in SW1 for S$6.5m, of which S$3.5m will be funded by issuing new shares at S$0.578/share. 
  • SW1 is one of the leading aesthetic, plastic surgery and medical spa establishments in Singapore, founded by the team behind The Sloane Clinic which was hit by a doctor exodus in Jan 18, according to the news agency Today.  SW1’s founder, Dr Low Chai Ling, is a highly-regarded aesthetics doctor and author sought after by celebrities from Hong Kong, Malaysia and Indonesia to the point that she has had to limit new patient intakes. 
  • SW1 operates out of Paragon in a new 7,000sf aesthetic centre with a team of five aesthetic medical professionals and one plastic surgeon. The clinic adopts a range of new technologies, such as US Federal Drug Administration-approved lasers, ultrasound and radio-frequency aesthetic technology.
  • Aesthetics remains a growing market especially in Asia, through the influence of Korean pop culture, Instagram and the general perception that better-looking people get better jobs. We believe the SW1 acquisition fits nicely into SMG’s plan of evolving to be a premium regional cradle-to-grave healthcare platform. 
  • SMG intends to expand SW1 overseas into Vietnam, Indonesia and Malaysia where Dr Low has a strong following among high-profile personalities.


STOCK IMPACT


Share price weakness presents opportunity. 

  • Since the announcement of the rights issue, the market has reacted negatively with SMG share price falling 16% from the recent high of S$0.63. At current levels, the stock is trading at an attractive 17.7x 2018F PE with a 2017-20 EPS CAGR of 27%. 
  • Furthermore, investors would be buying into the stock at a small 6% premium to the rights price. Dr Beng Teck Liang’s last open market purchase of SMG shares was at an average price of S$0.5373 in Mar 17.


EARNINGS REVISION/RISK

  • We make no changes to our 2018-19 earnings estimates but we adjust for the new rights shares.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower target price of S$0.74, based on an enlarged share base and pegged to peers’ average 2018F PE of 25.8x (previously 26.8x).


SHARE PRICE CATALYST

  • Earnings-accretive M&A.
  • Stronger traction in high-growth markets such as Vietnam.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-19
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.74 Down 0.830



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