TalkMed Group - RHB Invest 2018-04-27: Better Quarters Ahead With Dr Ang’s Return

TalkMed Group - RHB Invest 2018-04-27: Better Quarters Ahead With Dr Ang’s Return TALKMED GROUP LIMITED 5G3.SI

TalkMed Group - Better Quarters Ahead With Dr Ang’s Return

  • TalkMed reported a weak 1Q18, with its topline declining 25.7% y-o-y and PATMI plunging by 37.2% y-o-y, mainly due to the suspension of its key contributor and CEO, Dr Ang.
  • On the bright side, we note that losses from associates have been reduced drastically by 60% y-o-y, and we expect it to generate profits by end-FY18.
  • In addition, with the resumption of Dr Ang’s medical duties on 25 Mar, we expect the group’s revenue and earnings to improve in subsequent quarters.
  • Maintain NEUTRAL, with a slightly lower SGD0.70 Target Price (from SGD0.72, 0% upside), as we expect Dr Ang’s practice to take a short while to ramp up.

Huge potential in mesenchymal stem cells (MSCs).

  • Mesenchymal Stem Cells (MSCs) are currently used in regenerative medicine and therapy overseas, for aesthetic as well as other purposes. Management believes that there is huge potential in this area. 
  • Its 60%-owned subsidiary, Stem Med Pte Ltd (Stem Med), has embarked on a research and clinical programme for MSC use in the region. However, we understand that, in Singapore, cellular therapy can only be approved under the auspices of clinical trials. As such, the main monetisation of these therapies in Singapore would likely only come when regulations are altered.

M&A is still a possibility.

  • With net cash and a war chest of over SGD78m, TalkMed would also likely acquire private clinics locally – either in medical fields it is already involved in, or expand into new medical areas. As a result, we do expect M&A plans to still be one of management’s top priorities.

Dr Ang Peng Tiam resumed medical duties on 25 Mar.

  • We expect him to be a key contributor to FY18F earnings. As a result, we do expect more positive revenue and earnings in the subsequent quarters. However, as it typically takes a doctor 1-2 quarters to reach a full utilisation rate, we expect Dr Ang to contribute significantly to group numbers by the end of 3Q18.

Losses from associates have been pared down; a turnaround is expected.

  • We note that losses from associates – mainly from the Hong Kong Integrated Oncology Centre (HKIOC) and Integrated Imaging & Endoscopy Diagnostic Centre (HKIEDC), of which TalkMed owns 30% – have reduced drastically by 60% y-o-y. We expect them to be in the black by end-FY18. This would also help to bump up TalkMed’s FY18F earnings.

Time needed to ramp up.

  • We think that it would take Dr Ang at least six months to ramp up his practice to close to full capacity. As such, we adjust down our FY18F earnings by 3%, resulting in a slightly lower DCF-backed Target Price of SGD0.70. 
  • We remain NEUTRAL on the stock, as we think the major inflection point for TalkMed’s financial performance would be somewhere between 2Q18 and 3Q18. 
  • Despite 2Q18 being a relatively weak quarter, we believe it would be better than the performance recorded in 1Q18. 
  • Key risks include the non-renewal of its consultancy restatement agreement.

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-27
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.70 Down 0.720