Singapore Medical Group - RHB Invest 2019-11-13: Valuation Cheap But Can Wait; Downgrade To NEUTRAL


Singapore Medical Group - Valuation Cheap But Can Wait; Downgrade To NEUTRAL

  • Downgrade to NEUTRAL from Buy with P/E-derived (from DCF) Target Price of SGD0.36, 9% upside.
  • SINGAPORE MEDICAL GROUP (SGX:5OT)'s 3Q19 revenue rose to SGD24.2m (9.6% y-o-y) due to organic growth from Health and Diagnostic & Aesthetics businesses. PATMI was SGD3.1m (-0.1% y-o-y) from higher cost.
  • Due to muted earnings growth, and the lack of catalysts to propel its share price, we peg our Target Price to a 1-year average historical forward P/E of 13.4x.

Gross margin up y-o-y, down q-o-q.

  • Singapore Medical Group's gross profit increased 15.5% and 12.7% in 3Q19 and 9M19 to SGD11m and SGD31.8m due to higher revenue. See Singapore Medical Group Announcements.
  • Gross margin improved 2.3% y-o-y to 45.7% due to a change in sales mix of the Diagnostic & Aesthetics and Health businesses. Net profit of SGD3.2m was 4% higher y-o-y. However, net margin fell to 13.2% from 13.9% due to higher distribution and selling, and administrative expenses. q-o-q, gross margin dipped 0.7ppt from 46.4%, resulting in a fall in net margin from 15.2% in 2Q19 to 13.2%.

Untapped proceeds from the convertible loan of c.SGD9.3m.

  • Since drawdown of the convertible loan in Jun 2019, Singapore Medical Group has yet to make any acquisitions.
  • We think that it is unlikely that any M&A activities will happen any time soon as if any, it should have happened sooner as the funds were made available since the proposal was announced in Feb 2019. The unutilised loan should generate a negative carry and is likely to impact its performance.

Near-term outlook stable but unexciting.

  • Management is actively working on growing the business organically with a target to add 10-12 specialists this year. We expect it to deliver healthy revenue growth; however, near-term profitability growth should be dampened by higher cost, and time is needed for the new specialists to ramp up its utilisation.

Downgrade to NEUTRAL

  • Downgrade to NEUTRAL with P/E-based Target Price of SGD0.36. See Singapore Medical Group Share Price; Singapore Medical Group Target Price.
  • While Singapore Medical Group is trading at 12.2x P/E vs peers’ 22x, its lack of near-term catalysts and muted earnings growth are likely to lead the stock price to trend sideways.
  • In view of the absence of the contribution from potential acquisitions in the near term, we lower our revenue forecasts for FY20 and FY21 by 11%. We also adjust our earnings by 4 and 5% respectively on higher margins than previously forecasted.

Lee Cai Ling RHB Securities Research | Jarick Seet RHB Invest | https://www.rhbinvest.com.sg/ 2019-11-13
SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 0.36 DOWN 0.480