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SMG should be valued closer to Singapore O&G's offer, says UOB Kay Hian; shareholders should 'reject offer'

·2-min read

"Armed with better overseas exposures in Vietnam Indonesia and Australia, we think there could be potential upside to SMG’s offer"

UOB Kay Hian analyst Llelleythan Tan has advised Singapore Medical Group’s (SMG) shareholders to reject the group’s offer.

On Sept 13, SMG’s CEO, non-executive chairman and executive director made a conditional general offer of 37 cents per share to the group’s shareholders.

The offer is made with a view to delist and privatise the company.

In his report dated Sept 22, Tan is less than impressed with the offer price despite its premium to the volume weighted average prices (VWAPs), as it stands below his target price of 45 cents, which was already reduced from 53 cents.

The lowered target price represents 14x the company’s earnings per share (EPS) for the FY2022 ending Dec 31. It was also a result of Tan’s lowered EPS estimate for the FY2022 by 15% to account for SMG’s weak 1HFY2022 results. The analyst has reduced his earnings estimates for the FY2022, FY2023 and FY2024 by 15%, 14% and 13% respectively after reducing his gross margin assumptions by 1.9%, 2.0% and 2.0% to 43%, 43% and 43% each, to account for higher staff costs and doctors’ fees.

“While the cash price represents premiums of 18%, 19%, 16% and 18% over the VWAP per share for the one-month, three-month, six-month and 12-month periods respectively, it is 18% below our target price of 45 cents. The cash price represents a premium over that for the last three-year period, other than the period between December 2020 and April 2021 where SMG announced a potential transaction involving its shares which eventually did not come to fruition,” Tan points out.

The analyst adds that the offer represents an FY2021 P/E of 11.5x, lower than the takeover offer for obstetrics and gynaecology company, Singapore O&G. The latter was recently taken over for around an FY2021 P/E of 16x.

As such, the analyst suggests that SMG’s shareholders should wait for a “potentially better offer”.

“Armed with better overseas exposures in Vietnam Indonesia and Australia, we think there could be [a] potential upside to SMG’s offer. As the offer is not final, the offer price and/or the acceptance condition are subject to revision,” says Tan.

“In addition, we think SMG 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,” the analyst adds.

Shares in SMG closed 0.5 cent higher or 1.37% up at 37 cents, the same as the privatisation offer made.

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