Singapore Medical Group (SMG) - UOB Kay Hian 2018-05-16: 1Q18 Results In-line; SW1 Acquisition Earnings Yet To Make Contribution

Singapore Medical Group (SMG) - UOB Kay Hian 2018-05-16: 1Q18 Results In-line; Sw1 Acquisition Earnings Yet To Make Contribution SINGAPORE MEDICAL GROUP LTD SGX: 5OT

Singapore Medical Group (SMG) - 1Q18 Results In-line; Sw1 Acquisition Earnings Yet To Make Contribution

  • Singapore Medical Group’s 1Q18 net profit is in line with our estimate.
  • Net profit rose 138.9% y-o-y due to earnings-accretive acquisitions made during the year. The stock is trading at an undemanding 17.7x 2018F PE, with zero contribution from the recently-acquired SW1 clinic.
  • With S$10.8m cash coming from the rights issue later this year, the group is on the lookout for further acquisitions. 
  • Maintain BUY and PE-based target price of S$0.74.



RESULTS

  • 1Q18 results in line. Singapore Medical Group (SMG) reported a 37% y-o-y increase in sales for 1Q18. The health segment’s revenue rose by S$4.6m, or 47.7%, due to contributions from Astra Companies and the Kids Clinics, both of which were acquired in 2017. The diagnostics & aesthetics segment’s revenue rose by S$0.6m. Overall gross margin rose 3.2ppt due to better sales mix across the health and diagnostic & aesthetics segments.
  • Overseas ventures bearing fruit. SMG’s Ciputra eye clinic in Jakarta has come a long way from being a loss-making entity a few years ago. The eye clinic is now showing signs of growth and profitability. We expect the eye clinic to start breaking even this year. The group has also been executing growth initiatives at two clinics (total 215,000sf) in Ho Chi Minh, Vietnam, which will make SMG a major healthcare player in the city.
  • Domestic expansion coming along well. In Singapore, the group officially opened its new 5,500sf centre at Novena Medical Centre in Feb 18 which offers a range of cross- disciplinary radiology services. The group expects to add one radiologist and a visiting consultant radiologist in cardiac and paediatrics in 3Q18. In Apr 18, SMG acquired an 85% stake in Pheniks Pte Ltd, the operator of an aesthetics and plastic surgery clinic, SW1.


STOCK IMPACT

  • SW1 yet to contribute to the group. With the completion of the acquisition of SW1 in Apr 18, we should start seeing contribution in 2Q18. With a team of five general practitioners and one plastic surgeon, SW1 could contribute S$5m-10m in sales and profit of S$1m-2m per year.
  • Medical inflation in Singapore remains high. Even with a high base, Singapore’s healthcare inflation remained very high at 9.6% in 2017, according to an AON report. This ranked Singapore fourth with a score of 95.1, behind Vietnam, Malaysia and Pakistan. Most developed nations such as South Korea and Taiwan ranked significantly lower at 64.3 and 71.4 respectively. If healthcare inflation continues at such rates, this would effectively price out Singapore as a medical tourism destination. As one of the few regional healthcare plays in Singapore, SMG aspires to have revenue contribution of 50% from overseas operations by 2023.


EARNINGS REVISION/RISK

  • We make no changes to our 2018-19 earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain BUY and PE-based target price of S$0.74, pegged to peers’ average 2018F PE of 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 | https://research.uobkayhian.com/ 2018-05-16
SGX Stock Analyst Report BUY Maintain BUY 0.740 Same 0.740



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