TalkMed Group - RHB Invest 2018-11-09: Ramping Up Needs More Time; Prefer SMG


TalkMed Group - Ramping Up Needs More Time; Prefer SMG

  • Maintain NEUTRAL, new SGD0.64 Target Price from SGD0.70, 3% upside with 3% FY19F yield. Switch to Singapore Medical Group (SGX:5OT), a defensive sector pick recording growth.
  • TalkMed reported slightly better results in 3Q18, with revenue growing 15.3% y-o-y and PATMI up 7% y-o-y, mainly due to the return of its key contributor and CEO, Dr Ang Peng Tiam. However, as the growth was slightly slower than expected, we cut FY18F earnings by 9% to account for the longer ramp-up.
  • We expect revenue and earnings to continue improving in the subsequent quarters. That said, as we expect Dr Ang’s practice to take slightly longer to rev up, earnings growth will likely come only in FY19.

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 there is huge potential in this area. TalkMed’s 60%-owned subsidiary, Stem Med Pte Ltd, 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 will likely only come when regulations are altered.

Earnings to continue improving.

  • With key contributor and CEO Dr Ang Peng Tiam resuming his duties, we expect TalkMed’s performance to improve slightly in 4Q18. This should spell better revenue and earnings growth in the subsequent quarters.
  • However, the ramp-up has taken longer than expected (even though Dr Ang’s return has significantly contributed to the improvement) in 3Q18. We believe Dr Ang’s practice could reach full utilisation by end-1Q19.

Losses from associates significantly lower; 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 88% – have greatly decreased by 88% y-o-y.
  • We expect the associate companies to return to the black by FY88 – which should also help boost TalkMed’s FY88F earnings as well.

More time needed to ramp up.

  • We believe it will take Dr Ang at least up to 8Q88 before his practice is ramped up to full capacity. As such, we pare down FY88F earnings by 8% to account for the longer ramp-up period – which results in a slightly lower DCF-backed Target Price of SGD8.88.
  • We remain NEUTRAL on the stock, as the major inflection point for TalkMed’s financial performance should be in FY88.
  • We expect better quarters ahead, on an increase in consultancy services as well as an improvement in margins.
  • Key risks include the non-renewal of its consultancy restatement agreement.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2018-11-09
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.64 DOWN 0.700