Singapore Medical Group - UOB Kay Hian 2022-09-22: Wait Out For A Potentially Better Offer

SINGAPORE MEDICAL GROUP LTD (SGX:5OT)

Singapore Medical Group - Wait Out For A Potentially Better Offer

On 13 Sep 22, Singapore Medical Group received a general offer of S$0.37/share from TLW Success, an investment vehicle of its directors.
Although the offer represents a premium to Singapore Medical Group's VWAPs, it is below our reduced target price of S$0.45 (14x 2022F EPS), after trimming our 2022 EPS by 15% to account for the weak 1H22 results. Also, the offer represents 11.5x 2021 P/E, lower than Singapore O&G’s 16x 2021 P/E.

REJECT OFFER. We recommend Singapore Medical Group's shareholders to wait for a potentially better offer.

Singapore Medical Group (SGX:5OT) received a voluntary conditional general offer to privatise the company at S$0.37/share (cash consideration) or a 1-for-1 new share in the offeror (share consideration) on 13 Sep 2022. See Singapore Medical Group's announcements.
TLW Success is equally-owned by Singapore Medical Group’s Non-Executive Chairman Mr. Tony Tan Choon Keat, Executive Director and Chief Executive Officer Dr Beng Teck Liang and Executive Director Dr Wong Seng Weng.
TLW has secured irrevocable undertakings to accept the share consideration in respect of approximately 51.67% of the shares. The offer is conditional upon TLW and concert parties holding more than 90% of the total number of shares at the close of the offer (acceptance condition). However, the offeror reserves the right to reduce the acceptance condition to a lower minimum acceptance level (but above 50%), subject to obtaining the consent of the Securities Industry Council of Singapore.

TLW Success has highlighted significant headwinds Singapore Medical Group faces, including a challenging macro-economic and operating environment driven by operational cost increases, a shortage of skilled healthcare labour, and wage increases in the midst of an inflationary environment.
The offeror added that while there are still investment opportunities in both organic and inorganic growth, the environment in which such opportunities can be realised will become more challenging in the short to medium term. The offeror is of the view that the offer provides an attractive exit alternative for shareholders who wish to exit their investment in an uncertain economic environment.

The cash price of S$0.37 represents P/NAV and P/NTA of 1.1x and 4.2x respectively. On a P/E basis, it implies an 11.5x 2021 P/E and 11.7x 2022F P/E based on our reduced estimate. The P/E multiple offered is lower compared to the recent takeover offer of Singapore O&G, which offers a P/E ratio of around 16x 2021 P/E.
See Singapore Medical Group's share price history. While the cash price represents premiums of 18%, 19%, 16% and 18% over the volume-weighted average price (VWAP) per share for the 1-month, 3-month, 6-month and 12-month periods respectively, it is 18% below our target price of S$0.45 per share (based on 14x 2022F P/E).
The cash price represents a premium over that for the last 3-year period, other than the period between Dec 20 and Apr 21 where ounced a potential transaction involving its shares which eventually did not come to fruition.

In Mar 22, Singapore O&G (SGX:1D8), a listed obstetrics and gynaecology (O&G) company on SGX, received a voluntary unconditional takeover offer from a vehicle wholly-owned by Dymon Asia Private Equity (SE Asia) ll.
Singapore O&G provides healthcare services in Singapore and Malaysia, specifically in paediatrics, cancer-related general surgery, dermatology and O&G, similar to Singapore Medical Group. The cash offer of S$0.295 a share implies about 16x 2021 P/E, which is higher than Singapore Medical Group’s offer of 11.5x 2021 P/E.
Armed with better overseas exposures in Vietnam Indonesia and Australia, we think there could be potential upside to Singapore Medical Group’s offer. As the offer is not final, the offer price and/or the acceptance condition are subject to revision.

Reduce our 2022-24 earnings estimates for Singapore Medical Group after accounting for the weak 1H22 on higher staff costs. We trim our 2022/23/24 earnings by 15%/14%/13% after reducing our gross margin assumptions by 1.9%/2.0%/2.0% to 43%/43%/43%, to account for higher staff costs and doctors’ fees.

We recommend investors to wait for a better offer potentially as the offer from TLW Success is not final, and the offer price and/or the acceptance condition(s) are subject to revision.
In addition, we think Singapore Medical Group should be valued closer to the recent general offer of Singapore O&G, given its expansion in high-growth markets, such as Vietnam’s aesthetics clinics, telemedicine through HiDoc, as well as solid organic growth initiatives from the addition of medical specialists.
Singapore O&G was recently taken over for around 16x 2021 P/E, higher than Singapore Medical Group’s current offer of 11.5x 2021 P/E.
Our target price for Singapore Medical Group would have been reduced by 15% to S$0.45 from S$0.53 previously based on an unchanged 2022F P/E of 14x (historical mean P/E).
See
Catalysts:
- Recovery in foreign patient load.
- Earnings-accretive M&As.
- Stronger traction in high-growth markets, such as Vietnam.

Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2022-09-22

SGX Stock Analyst Report REJECT OFFER MAINTAIN BUY 0.45 DOWN 0.530