Singapore Medical Group - UOB Kay Hian 2019-02-21: 2018 Results Below Expectations, But Growth Still Intact With Increased Stake From Strategic Investor


Singapore Medical Group - 2018: Results Below Expectations, But Growth Still Intact With Increased Stake From Strategic Investor

  • Singapore Medical Group reported a 52.1% y-o-y increase in net profit to S$12.9m in 2018, below our expectations.
  • However, the group announced that Korean healthcare group, CHA, will increase its stake to become the majority shareholder at 28% through the purchase of vendor shares & convertible loan. The investment is set to build on the expertise of CHA and drive Singapore Medical Group’s growth in women’s health and preventive care.
  • We cut 2019-20 net profit forecasts by 14% but maintain BUY with a lower PE-based target price of S$0.65, or 23x 2019F PE.


4Q18 results below expectations, but strong growth looks set to continue with increased stake by CHA.

  • SINGAPORE MEDICAL GROUP LTD (SGX:5OT) reported a 52.1% y-o-y increase in net profit to S$12.9m.
  • Although earnings came in below expectations at 92.3% of our forecast, the group’s strong growth trend will continue with the announcement of an increased stake by strategic investor, CHA Healthcare, part of the CHA Health Systems (CHA), a leading Korean healthcare group.

Revenue growth trend aided by acquisitions.

  • Group revenue increased 25.1% y-o-y to S$85.1m.
  • Healthcare revenue rose 19.1% y-o-y to S$60.1m while the diagnostic & aesthetic revenue surged 42.7% y-o-y to S$24.4m, driven by contributions from the group’s new imaging centre in Novena and SW1 aesthetics clinic acquired at end-Apr 18.

Administrative expense inched up, gross margin holding up.

  • Administrative expense increased at a slightly higher 27.2% y-o-y to S$5.6m in 4Q18. The group attributed this to an increase in staff headcount arising from the acquired subsidiaries and higher depreciation expense.
  • Gross margin edged up 1ppt from 42.4% in 4Q17 to 43.4% in 4Q18.


Stake increase from CHA Healthcare to 28%, becoming a major shareholder through purchase of vendor shares & convertible loan.

  • CHA Healthcare will increase its stake in Singapore Medical Group from 6.9% to 24.1% through the purchase of existing shares from certain shareholders in a S$50m investment. On approval of conversion of its loan (S$10m), the stake will increase further to 27.7%. Dr Beng’s (CEO) stake will be reduced from 12.7% to 6.4% as a result.

CHA, a large player with regional ambitions.

  • Headquartered in Seoul, the CHA Group is one of the largest private healthcare service groups in Asia and specialises in reproductive medicine, stem cell research and wellness care. It operates 26 general hospitals and medical centers in six countries and its two listed entities on the KOSDAQ have a combined market capitalisation of $1.9b.
  • The CHA-SMG collaboration is set to focus on two key areas - women’s health and preventive care.

Differential in vendor sales and convertible loan a slight concern…

  • The vendor shares will be sold at $0.605/share while the conversion price of the loan is $0.423/ share on a volume weighted average price basis. However, CHA commented that the investment level was conducted on an optimal basis of dilution, while allowing for Singapore Medical Group to continue on its organic growth.
  • CHA reiterated its commitment as a strategic partner with its proposed non-controlling 28% stake.

…but expansion plans given a boost.

  • Near-term organic growth initiatives are in place as the group continues to expand its women’s health, paediatrics and diagnostic imaging businesses in 2019. Some initiatives to look forward to include the official launch of the SW1 Aesthetics Clinic in Vietnam in 1Q19, in addition to recent openings in Singapore of SW Clinic at OUE Downtown and a new O&G clinic in Punggol.
  • Further regional expansion plans are also exciting as the group forays into Cambodia with its diagnostics business as well as plans to scale up its aesthetics platform in Indonesia and Malaysia. 80% of the net loan proceeds from CHA will be utilised in M&A.
  • Overall, Singapore Medical Group’s overseas aspirations remain at the forefront and will likely receive a boost from the new investment.


  • We cut our 2019-20 net profit estimates by up to 14%, factoring in higher administrative expenses from the expansion of operations as well as an enlarged share base upon conversion of loan to shares.


  • Maintain BUY with a lower PE-based target price of S$0.65, pegged to revised peers’ average 2019F PE of 23x (previously 22.2x).
  • While there may be some downside to the dilution and reduced management stake, Singapore Medical Group’s growth plans is enhanced with the investment and its pipeline of projects remain strong. The stock is also trading at a lower 16.6x 2019F PE among peers.


  • Earnings-accretive M&A.
  • Stronger traction in high-growth markets such as Vietnam.
  • Increased stake from CHA.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-21
SGX Stock Analyst Report BUY MAINTAIN BUY 0.65 DOWN 0.740