Asian Healthcare Specialists Limited - NRA Capital Research 2018-06-18: Highly Profitable Business With Aggressive Growth Plans

Asian Healthcare Specialists Limited - NRA Capital Research 2018-06-18: Highly Profitable Business With Aggressive Growth Plans ASIAN HEALTHCARE SPECIALISTS SGX: 1J3

Asian Healthcare Specialists Limited - Highly Profitable Business With Aggressive Growth Plans

Highly profitable business

  • Asian Healthcare Specialists (AHS) is best known as The Orthopaedic Centre (TOC) chain of clinics. The popularity and skill of its top doctors is evidenced by their revenue generating ability.
  • Each of the top four specialists earned S$7,413/day (S$2.7m/year) of sales in 1H FY18 ended March.
  • After adjusting for IPO and listing costs, we estimate that recurring PAT is about S$3.64m/year, on a post-listing equity base of only S$12m. Hence, Asian Healthcare Specialists (AHS) returns > 20% on its equity each year.

To pay >= 50% of PAT as dividends in FY18 and FY19

  • The top specialists own 81.3% of The Orthopaedic Centre (TOC). Hence, there is strong alignment of interests between doctors and shareholders. As an incentive to shareholders, the group has declared an interim dividend of 0.2 cents within two months of its IPO and plans to pay out not less than 50% of FY18 and FY19 profits as dividends.

Has aggressive plans to grow

  • Currently, The Orthopaedic Centre (TOC) only covers four subspecialties of the orthopaedic specialty and it plans to recruit and acquire more specialists to expand the breadth and depth of its services to include e.g. musculoskeletal oncology and hand surgery. Part of its plan is to hire neurosurgeons to establish a pain management centre to complement its treatment of spine-related conditions.
  • We estimate that the acquisition of an existing practice with S$2.75m of revenue per year can expand core earnings per share by 24.5% in FY19, excluding IPO expenses in FY18.

Positive industry dynamics support long term growth

  • The upside is that Asian Healthcare Specialists (AHS) faces an aging population and a growing pool of newly trained specialists in the public sector. 
  • We estimate growth in the number of elderly people to raise demand for orthopaedic services by about 9%/year over the next five years. Hence, the growth potential of AHS is high if it can translate growing industry demand into revenue growth.

Key risk

  • The downside is that revenue growth slowed in 1H FY18 as one new specialist, that was hired in Nov 2017, probably contributed less revenue than the four more experienced specialists. That said, spine surgeries are relatively less frequent than other procedures and patients also take more time to decide on spine operations.
  • As their existing spine specialist already enjoys high demand, the doctors plan to refer new spine cases to the new specialist to spur organic growth.

Rerating will depend on realisation of future catalysts

  • For now, we value Asian Healthcare Specialists (AHS) based on the expectation of at least one completed acquisition in the beginning of FY19 and organic revenue growth of 5% in 2H FY18 over 1H FY18 and in FY19, leading to a valuation of S$0.330 – S$0.380 per share (@24.20x P/ FY19 E and 16.18x EV/FY19 EBITDA).
  • For now, we leave AHS unrated to observe for catalysts such as
    1. evidence of organic growth in 2H FY18 and
    2. progress towards any M&A that would raise growth for FY19.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2018-06-18
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