Bonds

Idea of the Week: Can we still expect Thomson Medical Group to exercise the call option?

The TMGSP 5.500% 31May2028 Corp (SGD) paper is callable in May 2024, and we think that the Group is unlikely to exercise the call option in light of the recent Vietnam acquisition.

Wong Di Ming
|
Published on 02 Dec 2023

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Thomson Medical Group plans to acquire Far East Medical Vietnam Limited, primarily for the FV Hospital in Vietnam.
The acquisition will result in the deterioration of its credit profile, although we expect this to improve over the next few years.
With the planned developments in the upcoming years, its outlook should be mostly decent given the higher expected revenue coming from the acquisition.
However, we believe TMGSP 5.500% 31May2028 Corp (SGD) will not be redeemed earlier for refinancing, given the higher-for-longer outlook for interest rates alongside the deterioration of the credit profile.

Thomson Medical Group

Established in 1979, Thomson Medical Group (“TMG”) has since become one of the leading listed healthcare players in the Southeast Asian region, with operations in Singapore and Malaysia – and now looking to expand into the Vietnamese market. Singapore represents the largest part of TMG’s market, with 79% of the EBITDA contributed by the operations in Singapore as of FY23 results.

In Singapore, it operates the commonly known Thomson brand of clinics and specialist centres, providing healthcare services with a focus on women and children. In Malaysia, it primarily operates Thomson Hospital Kota Damansara (“THKD”) through its majority-owned subsidiary TMC Life Sciences, while Vantage Bay Healthcare City, an integrated health and wellness development, is currently planned for development in Iskandar, Johor Bahru’s city centre.

Recently, TMG has announced the decision to acquire Far East Medical Vietnam Limited (“FEMV”), which operates a range of healthcare facilities in Vietnam. Most notably, it operates the FV Hospital in Vietnam, a multi-disciplinary tertiary hospital and the first Joint Commission International (“JCI”) accredited hospital in South Vietnam. Details on the acquisition will be further discussed in the later section.

Financial Highlights

Chart 1
TMG’s historical (Left) Revenue and (Right) Profit before tax (in SGD m)

For the full year ended 30 June 2023, TMG saw increased revenue but a lower profit before tax year-on-year (“YoY”). Revenue increased from SGD 333.7m in FY22 to SGD 355.8m in FY23, a jump of 6.6% from the previous year. TMG attributed this to higher average bill sizes in Singapore, while in Malaysia, it saw increased patient loads given the new bed openings in THKD’s new expansion wing and also higher case intensity handled.

For its profit before tax, the figure had fallen from SGD 58.6m in FY22 to SGD 41.1m in FY23, owing to a couple of reasons. Firstly, staff costs and other operating expenses rose rather significantly in FY23, increasing from SGD 107.9m (FY22) to SGD 118.0m (FY23) and from SGD 70.5m (FY22) to SGD 80.7m (FY23) respectively. The jump in other operating expenses was due to higher professional fees incurred for potential acquisitions and the opening of a new expansion wing at THKD – which had also contributed to the additional headcount required and therefore, increased staff costs.

Next, finance costs had been another area that saw a considerable jump, from SGD 23.5m in FY22 to SGD 30.5m in FY23. The impact largely came from increased borrowings by about 19% YoY (for the new expansion wing at THKD) and partially contributed by higher interest rates (all bank loans undertaken are on a floating rate basis).

Lastly, TMG noted a decrease in government grants provided in FY23, initially provided to support companies during the COVID-19 pandemic, resulting in a drop of other income from SGD 9.82m in FY22 to SGD 5.64m in FY23.

Looking at TMG’s historical performance over the past years, the growth in revenue shows a commendable effort in its strategy towards expansion and establishing its presence in Malaysia. For the profit before tax, while there have been improvements over the years, it continues to look volatile.

*Note: 2020 was an exceptional case due to a significant one-off impairment on its 9.23 hectares of freehold land in Iskandar Development Region, Johor Bahru, Malaysia. The impairment was valued at SGD 93.4m at that point in time. TMG indicated that excluding the effects of the impairment, it would have recorded an operating profit of SGD 10.8m for FY20.

Taking into account other operational figures, we feel that TMG has mostly embarked on the right track despite the challenges it faces. Particularly, the progressive growth in free cash flow since 2020 (SGD -27.0m in FY20 to SGD 46.3m in FY23) reflects well on the direction it has taken thus far.

Expansion into Vietnam and acquisition of FV Hospital

This acquisition is likely TMG’s highlight of the year given the size of the transaction involved. It is reported to be Vietnam’s biggest healthcare transaction to-date and also Southeast Asia’s largest healthcare acquisition since 2020.

The initial consideration of the transaction is valued at SGD 487.5m, translating into an enterprise value (“EV”) of SGD 445.3m. Based on FEMV’s FY22 EBITDA, the EV/EBITDA ratio is estimated at about 16.8x, which TMG reflected to be slightly below the mean EV/EBITDA of 23.0x for past comparable healthcare transactions within the ASEAN region since 2010.

Most notably, the valuation of FEMV is largely made of goodwill, given that enterprise value is at SGD 445.3m (based on initial consideration) while the net book value is approximately SGD 70.6m. TMG stated that the acquisition will be funded via internal resources and external borrowings, from financial institutions and debt capital markets. It further indicated there will be an increase in borrowings of SGD 467.1m for the acquisition.

The positive and negative impacts brought about by the acquisition are summarised in the table below.

Table 1
Impact arising from the acquisition of FEMV

Positive	Negative
Increase in pro forma revenue by 31%	Pro forma net-debt-to-equity ratio increases from 0.8x to 1.7x
Increase in pro forma EBITDA by 26%	Cash position to fall slightly due to partial funding from borrowings
Pro forma revenue contribution from Vietnam will be at 24%, allowing TMG to attain diversification	Earnings per share to fall in FY24 due to financing and transactional expenses related to the acquisition
No impact to NAV per share due to funding coming from debt	Pro forma net tangible assets fall from SGD 93.8m to SGD -369.8m due to valuation of FEMV arising mostly from goodwill
Source: Company announcement pertaining the proposed acquisition.

TMG’s credit profile is likely to deteriorate post-acquisition, given the large amount of borrowings required for the acquisition. On the other hand, while the acquisition is likely to stretch TMG to its limit, upcoming contributions from the Vietnam hospital and operations should allow TMG to see gradual improvements in its credit profile in the upcoming years. The credit profile will be further discussed later in this article.

Thomson Medical Group’s outlook

On one hand, TMG had been clear in its development pathway. It seeks to expand and establish itself beyond the Singapore market, which we saw the opening of a new expansion wing at THKD and following up, the upcoming development in Iskandar. Now, we see aggressive expansion into the Vietnam market, with TMG’s reason being this allows them to tap into Vietnam’s growing private healthcare market. From 2017 to 2022, Vietnam saw healthcare expenditure growth at 9.2% CAGR. Beyond that, one of TMG’s other rationale for the acquisition is because of FV Hospital’s “highly visible” expansion plan, which intends to construct and develop H building right beside the existing FV Hospital – allowing the hospital to expand existing services.

As such, TMG’s strategy towards expansion has been a reassuring point for investors. At the same time, its growth-seeking journey appears mostly to be in the right direction. This is supported by the relatively stable growth in revenue (despite volatility in profitability) and also a growing free cash flow that reflects operational growth.

However, any growth plans have its challenges, and there is one that is clearly hindering TMG from attaining the full potential of its growth. Across FY23, higher costs have taken a toll on TMG’s performance. While attributable to the new expansion wing at THKD, higher operational costs and finance costs ate into the additional profits that the expansion could have brought about.

Therefore, while we are mostly positive about TMG’s development plan in the near term, given the acquisition in Vietnam and continued development in Malaysia, its outlook will be limited by how prudent TMG would be in managing costs. Top-line is expected to improve given increased contributions from the Vietnam hospital, but the bottom-line in the immediate term is expected to be heavily impacted by fees related to the acquisition in addition to the higher financing costs.

Credit and Liquidity Profile

For TMG’s credit profile, we will try to examine the relevant figures before and after the acquisition of FEMV where possible. As previously mentioned, TMG is expected to borrow an additional SGD 467.1m for the proposed acquisition, to partially cover the initial consideration of SGD 487.5m.

TMG sits on a comfortable cash position of SGD 286.6m as of FY23 (versus SGD 161.6m as of FY22), which after the acquisition, is likely to fall to approximately pro forma cash and cash equivalent of SGD 266.2m – still a sizeable amount. Coupled with minimal current borrowings as of FY23 at SGD 12.1m, the substantial cash position remains more than sufficient to cover immediate liquidity requirements and any interest payments should it be necessary.

The total borrowings amount to SGD 747.8m as of FY23, of which the majority are secured bank loans at 453.0m with the remainder being medium-term notes. TMG specified that all of its secured bank loans are on a floating rate basis, which accounts for ~61% of its total borrowings. Post-acquisition, pro forma total borrowings are likely to increase to SGD 1,214.9m. Assuming that the additional borrowings are on a floating rate basis, the borrowings on a floating rate basis will increase to ~76% of total borrowings.

The interest coverage ratio (“ICR”) stands at a comfortable ~3.3x, albeit a decrease from ~5.0x in FY22. However, post-acquisition pro forma ICR (estimated based on FY22 FEMV EBITDA and assuming TMG’s average cost of debt stays constant with the new borrowings) will fall further to ~2.6x.

Alongside a drastic increase in pro forma net-debt-to-equity ratio (0.8x to 1.7x), a quick glance at the figures reflects a deterioration in credit profile – particularly its overall debt profile. On one hand, we see no immediate worry for TMG given the prudent cash position that could be used to fulfill some repayments if needed. On the other hand, it will take a couple of years before TMG sees its credit profile improving back to levels before the acquisition.

Recommendations

Table 2
TMGSP Issuances

Issue	Ask Price	Years to Call/ Maturity	Yield to Call/ Maturity
TMGSP 4.050% 28Jan2025 Corp (SGD)	98.88	- / 1.16	- / 5.13%
TMGSP 5.500% 31May2028 Corp (SGD)	100.90	0.50 / 4.50	9.20% / 5.27%
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 1 December 2023.

TMG offers two senior unsecured papers of varying duration. TMGSP 5.500% 31May2028 Corp (SGD) has a call option attached, callable on 31 May 2024 at 102.75 per cent. of the principal amount, and resulting in the yield to call significantly higher at 9.20%.

Based on our understanding, we felt that the call option was to provide TMG with the opportunity of an earlier refinance of the notes should the interest rates fall earlier than expected. Given the current higher-for-longer outlook on interest rates and a deterioration in credit profile post-acquisition, TMG is quite unlikely to see favourable conditions for them to exercise the call option.

The deterioration in credit profile has been similarly reflected by the change in credit spreads. Since the announcement of the acquisition on 12 July 2023, the option-adjusted spreads on TMGSP 4.050% 28Jan2025 Corp (SGD) and TMGSP 5.500% 31May2028 Corp (SGD) have increased by 56 and 74 basis points respectively as of 1 December 2023. With the credit profile unlikely to recover in the next six months (until the call date), TMG is most probably unable to refinance at a cheaper cost than the current 5.50%. As such, investors should expect to hold TMGSP 5.500% 31May2028 Corp (SGD) to maturity.

We prefer the TMGSP 4.050% 28Jan2025 Corp (SGD) because of the shorter duration, while the yield to maturity on both issuances are mostly similar. In addition, assuming that TMG’s cash position does not change much over the next year, the pro forma SGD 266.2 of cash and cash equivalents will be more than sufficient to redeem the principal amount of SGD 175m on this paper.

Conclusion

We see a deterioration in TMG’s credit profile as a result of the additional borrowings required for the acquisition. That being said, we believe that its outlook is mostly decent with higher expected revenues from the Vietnam acquisition and other upcoming developments. With the comfortable cash position that TMG sits on, default risk is quite unlikely to be an issue, particularly for the shorter-duration paper.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in TMGSP 5.500% 31May2028 Corp (SGD), and the analyst who produced this report holds a NIL position in the abovementioned securities.

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Idea of the Week: Can we still expect Thomson Medical Group to exercise the call option?

Wong Di Ming

Published on 02 Dec 2023

Thomson Medical Group

Financial Highlights

Chart 1
TMG’s historical (Left) Revenue and (Right) Profit before tax (in SGD m)

Expansion into Vietnam and acquisition of FV Hospital

Table 1
Impact arising from the acquisition of FEMV

Thomson Medical Group’s outlook

Credit and Liquidity Profile

Recommendations

Table 2
TMGSP Issuances

Conclusion

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Idea of the Week: Can we still expect Thomson Medical Group to exercise the call option?

Wong Di Ming

Published on 02 Dec 2023

Thomson Medical Group

Financial Highlights

Chart 1TMG’s historical (Left) Revenue and (Right) Profit before tax (in SGD m)

Expansion into Vietnam and acquisition of FV Hospital

Table 1Impact arising from the acquisition of FEMV

Thomson Medical Group’s outlook

Credit and Liquidity Profile

Recommendations

Table 2TMGSP Issuances

Conclusion

Ways to Invest with FSM Global

Don't have an account with us?

Need Financial Advice?

Latest Articles More

more.articles More

Live Chat 8:30am to 10:30pm, (Mondays to Fridays excluding PH) and 8:30am to 12:30pm, (Saturdays excluding PH)

Select Country/Region

Chart 1
TMG’s historical (Left) Revenue and (Right) Profit before tax (in SGD m)

Table 1
Impact arising from the acquisition of FEMV

Table 2
TMGSP Issuances

Live Chat
8:30am to 10:30pm, (Mondays to Fridays excluding PH) and
8:30am to 12:30pm, (Saturdays excluding PH)