SI Research: Singapore Medical Group – The New Darling of Medical Stocks

According to Medical Tourism Index, a global destination-type performance measure for attractiveness of healthcare services of a country, Singapore ranked fourth on the global scale just behind Canada, UK and Israel in 2016.

As the leading medical destination in the region, the Singapore economy has benefitted from international patients coming over for a whole range of medical care ranging from health screening to specialised surgical procedures. But it would not just be the international patients that will be driving the sector.

Rapidly, the Singapore resident population is growing older and there is a significant and growing need to deliver more healthcare services going forward. As at end-June 2017, the proportion of residents aged 65 and over has increased from 8.5 percent in 2007 to 13 percent in 2017, according to Singapore Department of Statistics. That number is expected to reach 20 percent by 2030.

In fiscal budget 2018, Minister of Finance Mr Heng Swee Keat stated that the ministry has set aside $10.2 billion for healthcare expenditure this year. The current expenditure accounts for about 2.2 percent of Singapore’s gross domestic product, but it is expected to rise to three percent over the next decade. Noting that quality healthcare provisions will weigh even more on our nation’s priorities, Mr Heng further quipped that healthcare spending will exceed education spending within the next 10 years.

Riding on Singapore’s growing need for quality health services is Singapore Medical Group (SMG), a rising star within the healthcare sector. The group recently wrapped up its earnings announcement and will be undertaking a rights issue to fund expansion.

About SMG

Incorporated in 2005, SMG is a private specialists and healthcare provider with a network of just 20 medical specialists. Today, SMG boasts of 36 clinics in Singapore, offering multidisciplinary specialists healthcare services that include obstetrics and gyanecology, cancer screening and treatment, urology and aesthetic medicine.

Some of the group’s clinics and facilities are located at top-notch medical centres like Paragon, Mount Elizabeth Novena and Gleneagles Medical Centre.

Topline Expansion And Margin Improvement

SMG is a fast-growing medical group. In 2013, the CEO Dr Beng Teck Liang led SMG to embark on a rapid expansion direction and the group’s topline has been growing by double-digits since.

In FY17, SMG reported revenue of $68 million, representing a 63.5 percent growth from $41.6 million in FY16. The increase in topline was driven mainly by contributions from the acquisitions in FY17 and improving performance from its diagnostics and aesthetics segment.

For the full year, SMG saw margin improving across all segments. Under its health segment, SMG reported a gross profit of $19.3 million on revenue of $50.5 million, representing a gross margin of 38 percent compared to 30 percent in FY16. The diagnostic and aesthetics segment yielded a gross margin of 55 percent on revenue of $17.1 million, compared to 50.4 percent last year.

Owing to the acquisitions made in FY17 (Lifescan Imaging, Astra Companies, the Kids Clinic and Babies and Children Specialist Clinic), administrative expenses rose considerably by 63.5 percent to about $16 million on higher staff headcount and depreciation charges. Nonetheless though, owing to these value-accretive acquisitions, SMG made a net profit of $8.4 million in FY17 which was 242.5 percent higher than $2.4 million in FY16.

Rights Issue Weighing On Share Price

Despite reporting a stellar performance for FY17 on 28 February 2018, shares of SMG has been languishing as it fell from $0.56 to $0.505 as of 5 March 2018. Compared to its share price of $0.58 at the beginning of the year, SMG’s shares returned a negative 14.9 percent to date.

So why did shares of SMG plunge? Was there an expectation of even better performance? Actually, SMG’s financial performance was largely anticipated and its share price was already driven high last year (to a high of $0.71 per share in July 2017). Since there was no earnings surprise, there was not really any compelling reason to see its share price driven higher.

More significantly, the announcement of a 1-for-20 rights issue at $0.48 per share was the primary reason why its share price fell lower, as investors have to factor in the dilution for the exercise.

According to maximum base scenario, assuming all shareholders subscribe and pay for all the rights issue of 23,040,532 rights shares, the total number of issued shares after completion of the exercise will be 483,851,204 shares. The percentage of the rights shares of the enlarged share capital will approximate to 4.8 percent. In other words, investors are looking at about a 5 percent dilution in SMG’s earnings-per-share (EPS) upon completion of the rights issue.

Proposed Acquistion Of Pheniks

Notwithstanding the proposed rights issue exercise, SMG has proposed to acquire an 85 percent stake in Pheniks, at a consideration of $6.5 million. Pheniks is a holding company for SW1 clinic and the latter is one of the largest aesthetic, plastic surgery and medical spa establishments in Singapore.

The proposed acquisition will be funded by way of issuing new shares worth $3.5 million at $0.578 per share (representing about 6.06 million new shares) while the remaining $3 million will be paid in cash in three equal tranches.

Again, the enlarged share capital arising from this transaction will dilute EPS by a further 1.3 percent for existing investors. But as the saying goes that every cloud has its silver lining, the 1.3 percent dilution in EPS could be outweighed by a corresponding value-accretion, though there was no financial guidance based on the news release relating to the matter.

Still An Attractive Stock

Despite the recent share price plunge and upcoming rights issue, SMG is still an attractive stock to hold onto. Based on a simple assumption that SMG grows its net profit by 25 percent to about $10.5 million in the current FY18, the current share price of $0.510 would represent a forward-looking of approximately 25 times price-to-earnings per share, based on the new enlarged share capital.

For a group that has a track record of delivering on growth, a rights issue to fund acquisitions could be an opportunity for existing investors to accumulate more of the stock at a discount.

To show their commitment and confidence in SMG, four major shareholders including CEO Dr Beng have provided their irrevocable undertaking to fully subscribe for the rights issue. Collectively, the four major shareholders hold 38.69 percent of the group’s existing issued share capital.