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SI Research: Maintaining A Contrarian View Of Singapore Medical Group

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Since the start of 2018, Singapore Medical Group has caught the attention of Shares Investment with its strong growth. However, despite another splendid quarter this earnings season, the stock continues to trail lower. At the time of writing, the stock of Singmedical had shed almost another 10 percent to trade at $0.40 per share, falling from $0.44 when we last reviewed the stock in August.

Yet, amidst the negative share price performance, value seekers who believe that the long-term is a weighing machine should – in our view – continue accumulating or holding onto the stock. We reviewed the latest 3Q18 results and offer readers these reasons to maintain a contrarian view of the stock.

Earnings Review

Singmedical continues to be firing on all cylinders. For the latest quarter, revenue popped 18.9 percent to $22.1 million from $18.9 million a year ago. The main bulk of increase in revenue came from Singmedical’s Diagnostic & Aesthetics business which rose $3 million, owing to higher contribution from its new imaging centre at Novena and the aesthetic clinic. Meanwhile, existing specialist clinics and Kids Clinics (acquired in 2H17) also grew organically to contribute $0.6 million more under the group’s Health business.

The group is seemingly climbing up the value chain, reflected by gross profit margin expanding from 41.6 percent to 43.4 percent. Cost-wise, operating expenses did not rise meaningfully to erode earnings growth. For 3Q18, total expenses grew $0.8 million to $6.1 million, representing an expense-to-revenue ratio of 27.6 percent, lower than 28.3 percent in 3Q17. As a result, Singmedical posted earnings of $3.2 million for 3Q18, representing a year-on-year growth of 59.8 percent.

For the cumulative 9M18 period, Singmedical generated a net profit of $10 million on revenue of $62.9 million. This represented a growth of 27.8 percent for the top line and 66.7 percent for the bottom line of the group.

Against our initiation coverage for Singmedical, the group’s performance thus far is just a hair length away from our FY18 expectation. Previously in March 2018, we hypothesized that Singmedical would easily generate a net profit of at least $10.5 million for FY18.  As such, the group would very likely beat our expectation for this year.

Growth Strategies Set In Motion

Having built a track record in Singapore, Singmedical is setup to expand its operations abroad. For one, following its acquisition of SW1 clinic, the group is in advanced stages of scaling its aesthetics platform into other regions. Expanding the provision of aesthetics procedures should bode well for Singmedical as such procedures typically drive higher margins.

Due to increased competition from medical practices in neighbouring countries, Singapore is seeing a drop in medical tourism numbers and hence the expansion to overseas market would be a right strategy to win market share. At the onset, Vietnam would be the initial target country given that the group already has footprints in these destinations. Indonesia and Malaysia will serve as another gateway for regional expansion.

In addition, the imaging and diagnostics division – another higher margin segment – is also scaling up rather smoothly. Expanding the services abroad would be another natural progression for the group.

Locally, a second SW1 branch is slated to open in OUE Downtown Gallery in 1H19, and that should also boost the financial performance of Singmedical given that the group is experiencing rising demand for aesthetic procedures amongst working professionals.

Lastly, Singmedical has recently developed and launched its proprietary specialist telemedicine platform. The platform provides patients with convenient and confidential medical consultations. Patients across the region could consult with the group’s specialists throughout their treatment cycle without having to leave the comfort of their home. In our view, we believe this platform should help scale the specialist verticals for the group while value-adding to patients.

Cheapest Medical Stock

Financially, Singmedical balance sheet is also in the pink of health. Given that the group is generating cash of about $3 million from its operations every quarter, Singmedical has built up its cash assets to $18.3 million in 3Q18 compared to $14.3 million in 2Q18. In the meantime, the group has also partially pared down its debt to $19.5 million from $20.1 million during the latest quarter.

The group also has significant financial headroom given that its total debt-to-equity is only standing at 15.2 percent. Coupled with its growing positive cashflow, the group has significant ammunition to take on acquisitions.

Notwithstanding its investment merits, Singmedical is trading at a significant discount compared to its peers. For one, the stock which is now priced at $0.40 per share is trading at a trailing 12-months price-to-earnings (P/E) of only 14.6 times. On the other hand, local healthcare leader Raffles Medical Group is trading at P/E of 28.8 times, while others like TalkMed Group is trading at even higher P/E of 30.5 times.

One stark difference we noticed about Singmedical and its peers though is that the former has yet to reward shareholders with dividends. This may be the reason why local investors who are into healthcare stocks have shunned this stock. But with management having revealed its intention to deliver dividends in FY19, perhaps it would mark the start to the recovery of the stock price.

Nonetheless, Singmedical which continues to display much growth potential, is literally a steal at current valuations.

singmed valuationSource: Singapore Exchange

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