- The share price of Singapore Medical Group (SGX:5OT) fell after discussions with a third party regarding a possible share transaction fell through.
- Nonetheless, the company continued to deliver a great financial performance in the first quarter of 2021. It chalked up a record quarter due to strong demand from its Diagnostics & Aesthetics segment.
- The long-term growth story of the private specialist healthcare sector remains intact. Structural trends such as rising income level, an ageing population, and the advancement in technology will drive the growth of SMG.
- With a net cash position (including lease liabilities) of SGD 8.2 million, SMG is poised to deliver inorganic growth in the long term. We believe that target acquisition markets are likely to be in the Southeast Asian region.
- We have upgraded our target price to SGD 0.43, derived from a fair PE multiple of 14X applied to our estimated FY2023 earnings per share. This represents an upside potential of a decent 37% based on the closing price of SGD 0.315 on 23 July 2021.
In December 2020, the share price of Singapore Medical Group (SGX:5OT) rallied upon the announcement that the company is in discussions with a third party regarding a possible share transaction. This is not the first time that Singapore Medical Group (SMG) had explored a share transaction. Previously in 2019, CHA Healthcare (an international subsidiary of Korean healthcare group CHA Health Systems) became a controlling shareholder of SMG after increasing its stake through the purchase of 83 million vendor shares at SGD 0.605 apiece.
A few months after the initial announcement that sent SMG’s share price up, the discussions fell through as it was announced that SMG and the third party have decided not to proceed with further exploration of the transaction. Consequently, SMG’s share price had retraced most of its gains.
Nonetheless, we believe this is a good opportunity for investors to scoop up some shares. Here is why.
(Related article: An undervalued healthcare stock that is worth looking at)
Figure 1: One year share price performance of SMG
A record quarter thanks to its diversified business model
Despite a significant decline in medical tourism which historically accounts for 15% to 20% of revenue, SMG chalked up a record quarter in Q1 2021. It recorded a 7.6% year-on-year increase in revenue to SGD 24.8 million, mainly attributed to the Diagnostics & Aesthetics business segment (Table 1) which saw continued pent-up demand.
The pent-up demand can mainly be attributed to patients who were unable to access the services during the “circuit breaker” last year, as well as patients who are unable to get treatment overseas due to the current travel restrictions. Rising vaccinations could have supported the recovery in specialist outpatient admissions.
This diversified business model had more than offset the significant decline in medical tourism that affected the demand for oncology and cardiology services which are under the Health business segment.
Table 1: Business segments
|
Segment |
Service |
|
Health (65.7% of FY2020 revenue) |
Obstetrical and Gynaecological (O&G) |
|
Paediatrics |
|
|
Oncology |
|
|
General Medicine and Health Screening |
|
|
Cardiology |
|
|
Endocrinology |
|
|
Diagnostics & Aesthetics (33.9% of FY2020 revenue) |
Radiology and Diagnostic Imaging |
|
Refractive Surgery |
|
|
Aesthetics |
|
|
Dental |
|
|
Others (0.4% of FY2020 revenue) |
Business Consultancy |
|
Telemedicine |
|
|
Source: Singapore Medical Group, iFAST Compilations |
|
Additionally, the share of results of joint ventures entities and associates, which are SMG’s overseas investments, had reported a gain of SGD 0.2 million. SMG’s joint ventures in Vietnam and Australia have benefitted from rising patient volumes, while that in Indonesia enjoyed significant increases in revenue and profitability following the newly opened eye centre in Surabaya.
Meanwhile, net profit rose more than proportionately than revenue by 22.2% year-on-year to a record SGD 3.8 million mainly due to the change in sales mix. The Diagnostic & Aesthetics business segment tends to be able to deliver higher margins.
Needless to say, Q1 2021 was a great quarter for SMG.
Growth outlook remains robust
Looking ahead, the long-term growth story of the private specialist healthcare sector remains intact. We note several structural trends that will drive the growth of SMG.
Rising income level: Growing affluence increases the affordability of private healthcare services which tend to have shorter waiting times and offer greater availability of services as compared to public healthcare services.
Ageing population: Due to an ageing population, there has been a growing urge for people to look young, increasing the demand for aesthetics services. Moreover, an ageing population increases the demand for health services that treat ageing conditions and chronic diseases, such as oncology and cardiology, benefitting SMG’s Health business segment.
Figure 2: Ageing population in SMG’s markets
Adoption of remote work: Another structural trend driving the demand for aesthetics services is interestingly, remote working. According to SW1 Clinic (owned by SMG) Founder & Medical Director Low Chai Ling, the prevalence of remote working has provided people with adequate time to recover from invasive treatments at home and without having to return to the office to work, resulting in robust demand for such treatments. This should benefit SMG’s Diagnostic & Aesthetics business segment.
Advancement in technology: We believe that advances in technology will continue to lead the development of innovative products and procedures, influencing the growth of aesthetics services. Technology has also enabled the use of telemedicine services, which has become the one of the fastest growing segments in the healthcare sector. SMG has a telemedicine platform of its own, called HiDoc. While HiDoc has yet to contribute significantly to revenue, we believe that the increasing adoption of telemedicine services would lead to greater demand for services at HiDoc moving forward.
To address the growing demand for healthcare services, SMG’s recent initiatives include the hiring of two new doctors, and growing its number of clinics by around 8% from 35 in FY2019 to 38 currently. Depending on the specialist vertical, the typical gestation period before a new clinic is able to breakeven is between 9 to 24 months. Additionally, SMG will be increasing capacity at its Diagnostics Imaging centres this year as they had been operating at near full capacity. Looking ahead, despite the pandemic, SMG will keep the organic growth momentum going.
A healthy balance sheet to support inorganic growth opportunities
Supported by its ability to generate strong positive operating cash flows, SMG holds a net cash position (including lease liabilities) of SGD 8.2 million as of 31 December 2020. This represents a net debt-to-equity ratio of -5.3%, which is also slightly below the peer average.
Table 2: Net debt-to-equity ratio of SMG and its peers
|
Net Debt-to-Equity |
|
|
Talkmed Group |
-95.2% |
|
Singapore O&G |
-74.8% |
|
ISEC Healthcare |
-20.7% |
|
Singapore Medical Group |
-5.3% |
|
Raffles Medical Group |
0.2% |
|
HC Surgical Specialists |
5.7% |
|
Q&M Dental Group |
64.5% |
|
Thomson Medical Group |
90.9% |
|
Average |
-4.3% |
|
Source: Bloomberg Finance L.P. Data as of 31 December 2020 |
|
SMG employs a “buy and grow” strategy. It has always been aggressive in seeking out earnings accretive acquisitions and then growing the acquired businesses out further. With a healthy balance sheet, we believe that SMG will be able to deliver inorganic growth in the long term.
Due to the slowdown in medical tourism in Singapore due to high medical inflation and increasing competition from neighbouring countries, we believe SMG will be targeting markets in the Southeast Asia region (such as Indonesia) that were traditional sources of medical tourism in Singapore. However, such acquisitions are more likely to happen in the longer term as the management has shared that due diligence process remains challenging amid the uncertainty due to COVID-19 and the inability to travel.
Key investment risks
Despite the various merits, an investment in SMG does not come without risks.
Uncertainty brought about by COVID-19: SMG continues to be affected by the lack of medical tourism, particularly in the Health business segment. A tightening of COVID-19 restrictions such as temporary closures of non-essential medical services would affect certain services under the Diagnostics & Aesthetics business segment.
Furthermore, the pandemic has affected its Paediatric business unit’s projected earnings. This resulted in the recognition of SGD 3.0 million non-cash impairment loss on goodwill attributable to the unit which was acquired in 2017. Against the backdrop of uncertainty due to the pandemic, we think SMG may potentially record more impairment of goodwill in its future impairment testing.
Regulatory shifts across the paediatrics landscape: SMG faces regulatory shifts that may potentially affect demand for private specialist paediatrics services. For instance, enhanced subsidies from the Ministry of Health which took effect from 1 November 2020 has enabled all eligible Singapore children to receive full subsidies for childhood developmental screening at all Community Health Assist Scheme (CHAS) General Practitioner (GP) clinics and polyclinics. This is so that they may receive the necessary developmental assessments together with their childhood immunisations from their family doctor. This may potentially impact future demand for SMG’s paediatric services.
Potential upside of 37%
We upgrade our target price to SGD 0.43, derived from a fair PE multiple of 14X applied to our estimated FY2023 earnings per share. This represents an upside potential of a decent 37% based on the closing price of SGD 0.315 on 23 July 2021. Additionally, our estimated dividend yield is at 1.9% assuming that SMG maintains its dividend payout ratio of approximately 22%.
Table 3: Earnings projection
|
|
2020 |
2021E |
2022E |
2023E |
|
PE Ratio (X) |
17.7 |
12.8 |
11.4 |
10.2 |
|
Earnings Growth (%) |
-33.5 |
35.8 |
12.7 |
11.9 |
|
EPS (SGD cents) |
1.81 |
2.46 |
2.77 |
3.10 |
|
Projected fair price based on 14X fair PE |
SGD 0.43 |
|||
|
Potential upside |
37% |
|||
|
Source: iFAST Estimates Data as of 23 July 2021 |
||||
With a robust long-term outlook, we believe that it is a good opportunity to scoop up the shares of SMG (SGX:5OT) after its price retraced most of its gains this year. Additionally, while SMG had decided not to proceed with a third party regarding a possible share transaction, it continues to explore various avenues to enhance shareholder value, including possible corporate actions that can unlock value for shareholders.
Figure 3: Price vs EPS
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