Singapore Medical Group - RHB Invest 2019-05-10: Growth Initiatives Need Time; Downgrade to NEUTRAL


Singapore Medical Group - Growth Initiatives Need Time; Downgrade to NEUTRAL

  • Downgrade to NEUTRAL from Buy, with new DCF based Target Price of SGD0.48 from SGD0.56, 8% upside.
  • Despite higher revenue of SGD21.6m (+12.3% y-o-y) recorded in 1QFY19, SINGAPORE MEDICAL GROUP LTD (SGX:5OT)'s PATMI decreased 3% y-o-y to SGD3.3m on higher marketing and personnel costs.
  • We think that near-term profit growth should be impacted as the group is likely to incur higher costs as it embarks on aggressive growth expansion. We lower FY19F-21F earnings by 11-14%.

Aggressive organic expansion initiatives.

  • SINGAPORE MEDICAL GROUP LTD (SGX:5OT) added 5 new clinics YTD. The newly opened clinics are one O&G clinic and one Paediatrics clinic (opened in January), a new breast care clinic this month, and 2 SW1 clinics in January and April (Vietnam) respectively.
  • It was also mentioned that the Singapore Medical Group has plans to onboard 10-12 specialists in the current FY. Alongside the organic expansion, the group is actively seeking M&A targets and partnership opportunities.

Revenue increased 12.3% y-o-y and gross profit margin maintained.

  • Revenue increased mainly due to the acquisition of Pheniks in Apr 2018 under the diagnostic & aesthetics business segment. Health business segment revenue remained flat, as revenue growth was offset by the absence of revenue from the orthopaedic clinic.
  • Gross profit margin stayed the same at 46% in 1QFY19, while net profit margin decreased to 15.4% from 17.8%, due to higher distribution and selling expenses, as well as administrative cost.

Near term profitability to be impacted by the opening of new clinics.

  • Typically, it takes a new clinic 2-3 years to break even. Proportionally, expenses for new overseas clinics may be higher as more distribution & selling costs are needed to market its products and services in newer markets.
  • In addition, new specialists may take time to ramp up their practice to full capacity. Hence, despite healthy revenue growth, costs could outrun revenue in the next 2-3 years. As such, we lower Singapore Medical Group's FY19F-21F PATMI by 11-14%

Downgrade to NEUTRAL with new DCF-based Target Price of SGD0.48.

  • Although we think that the CHA Healthcare - Singapore Medical Group partnership may create synergies and onboarding of new specialists and new clinics launched will bring in decent topline growth, near-term cost pressure should impact net profit growth.

Lee Cai Ling RHB Securities Research | Jarick Seet RHB Invest | https://www.rhbinvest.com.sg/ 2019-05-10
SGX Stock Analyst Report BUY MAINTAIN BUY 0.48 DOWN 0.540