Singapore Medical Group - UOB Kay Hian 2018-08-15: 1H18 Delivering On Growth Promises But Undervalued

SINGAPORE MEDICAL GROUP LTD SGX:5OT

Singapore Medical Group - 1h18: Delivering On Growth Promises But Undervalued

Singapore Medical Group (SMG)’s 1H18 results are in line with our expectations. Net profit rose 70.2% y-o-y due to higher revenue growth and gross margins. Domestic performance has also been steady.
With its solid execution record and platform to grow in the region, the group is poised to see strong earnings growth.
Singapore Medical Group is trading at an undemanding 14.9x 2018F PE. Maintain BUY with an unchanged PE-based target price of S$0.74.

Singapore Medical Group (SMG)’s revenue increased by 33.1% y-o-y from S$30.7m in 1H17 to S$40.8m in 1H18. H-o-h, the health segment’s revenue improved to S$8.0m (+36.8% y-o-y), mainly driven by Singapore Medical Group’s Kids Clinics and organic growth of existing specialist clinics.
The diagnostic and aesthetics segment also gained S$2.2m (+25.6% y-o-y) on contribution from the newly-acquired imaging centre at Novena.

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Singapore Medical Group (SMG)’s gross profit margin increased by 2.3ppt from 43.3% in 1H17 to 45.6% in 1H18. This was due to the change in sales mix of the health segment and diagnostic and aesthetics segment. This had been the case in the past few quarters as the increase in contribution from higher-margin specialties such as aesthetics began to take effect, especially with the recent acquisition of the SW1 Clinic.

In Singapore, Singapore Medical Group (SMG) has seen promising results from key verticals. These include the paediatrics division which has developed from Singapore Medical Group’s original acquisitions to posting double-digit revenue growth. The company is slated to add a new paediatrics clinic in Sengkang soon.
Another key division is its diagnostic imaging segment, where Singapore Medical Group is looking to hire additional radiologists due to rising demand at its centres. Overall, organic growth initiatives are expected to gain momentum and Singapore Medical Group is looking to add 6-8 new specialists in 2019.

Following the acquisition of the SW1 Clinic in Apr 18, Singapore Medical Group is in advanced stages of its plan to scale up its aesthetics platform in the region, specifically in Vietnam. The SW1 Clinic has expanded into Vietnam and has already commenced hiring and is expected to be operational by Oct/Nov 18. Priced at a premium, the Vietnam clinic will look to target the growing affluence of the market.
On the Indonesian front, Singapore Medical Group’s JV eye clinic has begun to show profitability. Singapore Medical Group intends to commit S$3m to grow its overseas business ventures, with Vietnam taking centre stage.

Singapore Medical Group is also developing a proprietary specialist tele-medicine platform that allows patients to have real time reviews with their group’s specialists. While current tele-medicine avenues targeting primary care are available in the market (such as Doctor Anywhere), Singapore Medical Group is looking to utilise the feature for specialist reviews rather than new consultations, as a form of after- care provision.

We raise our 2018-19 net profit forecasts up by 4% to factor in the overseas investments and take into account the ramp-up phase for the SW1 expansion into Vietnam. Based on our new estimates, we project Singapore Medical Group would deliver a 3-year EPS CAGR of 28.7%.

Maintain BUY with an unchanged PE-based target price of S$0.74. pegged to revised peer’s average 2018F PE of 25.5.
Singapore Medical Group’s FY18F PE of 14.9x looks inexpensive against its 3-year EPS CAGR of 28.7%, which is the highest in the asset light healthcare groups.
We think its discount is unwarranted given its solid execution and regional platform to further expand and into attractive markets such as Vietnam and Indonesia.

Lucas Teng UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-15

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