Singapore O&G Ltd. More than stork delivery SINGAPORE | HEALTHCARE | INITIATION 17 June 2016 . Gaining market share by increasing number of clinics, specialties and choices. BUY (Initiate) . Effects from newly acquired Dermatology and Aesthetic business to kick-in this year. LAST CLOSE PRICE SGD 0.820 . Additional growth pillar (Paediatrics) by 2017. FORECAST DIV SGD 0.028 TARGET PRICE SGD 1.000 . Initiate with “Buy” rating and SGD1.00 TP, implying a 25.4% upside. TOTAL RETURN 25.4% Investment Merits COMPANY DATA (a) Growth story. Growing organically and inorganically to gain market share and expand O/S SHARES (M N) : 238 client base. SOG started with only Obstetrics and Gynaecology (O&G) services in 2011, M ARKET CAP (USD mn / SGD mn) : 144 / 195 expanding from a team of two O&G specialists to five. It has subsequently added three 52 - WK HI/LO (SGD) : 0.85 / 0.62 cancer specialists (two in 2014 and one in 2016) and one skin specialist (in 2015) to its 3M Average Daily T/O (mn) : 0.08 team. SOG has expanded from two clinics to 10 clinics in 6 locations. In Jul-16, it will MAJOR SHAREHOLDERS (%) add another clinic into its portfolio, totalling to 10 specialists operating from 11 clinics Dr. Heng Tung Lan 29.44% in 7 locations. Dr. Lee Keen Whye 18.88% (b) Diversification empowering its resiliency and less O&G-reliant. Successful integration Dr. Beh Suan Tiong 10.15% enables realisation of synergies and unlocking of value. SOG targets to add children Dr. Lim Teng Ee Joyce 8.56% healthcare services (Paediatrics) into its portfolio by 2017. Eric Choo 7.71% Dr. Choo Wan Ling 7.71% (c) Long term proposition in becoming a comprehensive female medicine and whole life provider, which could lock-in its female patient base for the duration of their lifespan. PRICE PERFORMANCE (%) 1M T H 3 M T H 1Y R (d) Increasing market share with supportive government initiatives and favourable macro COM PANY 3.9 5.4 17.6 backdrop. STI RETURN 1.44 (0.75) (13.48) (e) Experienced team of specialist medical practitioners. Most of its physicians have long PRICE VS. STI and established track record of at least 10 years in their respective field. 0.95 (f) Conveniently-located clinics with most of its medical clinics located within major 0.85 hospitals and are easily accessible by public transport. 0.75 (g) Strong financial position and clean balance sheet. Zero-debt with net cash position of 0.65 S$24.2mn (vs. market capitalisation of S$191mn) as at 31 Dec-15. 0.55 0.45 Investment Risks Jun-15 Sep-15 Dec-15 Mar-16 (a) Domestic and regional competition. SOG SP EQUITY FSSTI index (b) Lease renewal and unable to obtain a suitable location. Source: Bloomberg, PSR (c) Manpower risk. Key personnel risks, as the Group was highly dependent on three of its KEY FINANCIALS specialist medical practitioners; and challenges to retain and expand its talent pool. SGD M N F Y 14 F Y 15 F Y 16 F F Y 17F (d) Potential dilution in shareholders’ equity and shareholdings if the Group issues new Revenue 14 16 27 31 shares to finance its acquisitions. Also, future sale post moratorium or issuance of a EBITDA 4 5 6 10 large number of shares may have a downward pressure on share price. NPAT (adj.) 4 5 8 10 (e) Other risks: execution risks; single country risk; change of regulations and licensing EPS (S Cents) 1.20 1.46 1.83 2.01 requirements; liquidity risk as SOG is Catalist-listed; competition laws and regulations PER, x (adj.) 12.6 17.9 23.1 20.2 could limit growth; and occurrences of epidemics and pandemics may lower demand. P/BV, x 4.5 4.0 7.6 7.1 Investment Actions DPS (S Cents) - 2.0 2.8 3.2 Div Yield, % 0% 4% 3% 4% We think the stock has further upsides stemming from its 1) expansion plan backed by ROE, % 46% 30% 34% 36% strong financials and clean balance sheet, and 2) growing customer base underpinned by Source: Company Data, PSR est. favourable macro environment and experienced specialist team. We initiate coverage on SOG with a “Buy” rating with a target price of S$1.00 based on Valuation Method estimated 3.55 cents FY16 EPS and 28.2x FY16F PER. This implies an upside of 25.4% (with P/E Multiple @ 28.2x dividends) from its last closing price. Soh Lin Sin (+65 6212 1847) [email protected] Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: SG2016_0122 SINGAPORE O&G LTD. INITIATION Company Summary Company Overview Singapore O&G (SOG) is a leading group of Specialist Medical Practitioners dedicated towards women’s health and wellness with a long and established track record in the Obstetrics and Gynaecology (O&G) field. Its goal is to provide holistic, comprehensive, effective, and affordable life-long healthcare services to women and children. It specializes in pregnancy care and delivery, the female reproductive system, gynaecological and breast cancer, as well as skin and aesthetic treatments. It currently houses a team of physicians, comprising five O&G specialists, three cancer specialists, and one skin specialist. The Group is based in Singapore, and operates 10 clinics in 6 different locations. Its clinics are conveniently-located in the central and east regions of Singapore. (a) 2 clinics in Parkway East Medical Centre (b) 1 clinic in Paragon Medical Suites (c) 2 clinics in Gleneagles Medical Centre (d) 1 clinic in Thomson Medical Centre (e) 3 clinic in Mount Elizabeth Novena Specialist Centre (f) 1 clinic at Cassia Crescent It mainly derives its revenue from the provision of O&G services, which includes general and ancillary surgical services, breast and gynaecological cancer treatments, and medication and supplements. Nonetheless, medication and supplements are not significant revenue generators or profit contributors. O&G services contributed 91% of its FY15 total revenue, while the remaining 9% are from cancer-related services. Nonetheless, we expect the contribution from cancer-related business segment to pick up, and its net profit margin to improve, as Dr. Radhika’s business turned profitable in 2H15. Due to its O&G-focused business nature, its customer base comprises mainly individual patients. Management shared that, now, with the additional non-O&G services offered, it could tie up with corporate accounts to expand its customer base. SOG was listed on the Singapore Exchange – Catalist board on 4th Jun-15, with an offer price of SGD0.25. Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE) SINGAPORE O&G LTD. INITIATION Investment Thesis 1. Steady population growth provides a stable patient base As of Jun-15, Singapore has a total population of 5.5 million. According to the government White Paper published on 2013, Singapore’s total population of residents and non-residents in 2020 is projected to be between 5.8 and 6 million. By 2030, Singapore's total population could range between 6.5 and 6.9 million. No doubt that these projections are subject to Singapore’s fertility trends, life expectancy, social and economic needs, and the global and regional environment, but the government is projecting the population to grow at a 15-year compounded annual growth rate (CAGR) of 1.12%-1.52%. Figure 1: SG: Population Growth Slowing but stable growth rate above (Thousand) Population Population Growth Rate (%) 1%. 6,000 6% 5,000 5% 4,000 4% 3,000 3% 2,000 2% 1,000 1% Source: CEIC, PSR est. 0 0% 05 06 07 08 09 10 11 12 13 14 15 Figure 2: T12M Total Live Births Due to the predominantly ethnic- SG Total Live Births 60,000 %y-y T12M Total Live Births 25% Chinese demography in Singapore, Source: CEIC, PSR est. obstetrics services are seasonally 21.4% y-y 20% 50,000 Year of Dragon: 1988, 2000, 2012 higher in the Year of the Dragon, 15% which is regarded by the Chinese as 40,000 the most auspicious in the almanac. 7.6% y-y 10% 8.4% y-y 30,000 5% 0% 20,000 -5% 10,000 -10% 0 -15% 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Figure 3: Gross Reproduction Rate: Per Female The vital rates in Singapore have SG: Vital Rates Net Reproduction Rate: Per Female 1.6 Source: CEIC, PSR Fertility Rate: Per Female 11.0 remained relatively stable over the Crude Birth Rate: Per Population (RHS) past 10 years. 1.4 1.2 10.0 1.0 0.8 9.0 0.6 0.4 8.0 05 06 07 08 09 10 11 12 13 14 15 Page | 3 | PHILLIP SECURITIES RESEARCH (SINGAPORE) SINGAPORE O&G LTD. INITIATION Note: Gross reproduction rate is the average number of daughters each female would have during her reproductive years if she were to experience the age-specific fertility rates prevailing during the period. Net reproduction rate is the average number of daughters each female would have during her reproductive years if she were to experience the age-specific fertility and mortality rates prevailing during the period. It is a refinement of the gross reproduction rate, and is also the measure of replacement of population. Fertility rate is the average number of live-births each female would have during her reproductive years if she were to experience the age-specific fertility rates prevailing during the period. It is derived by aggregating the age-specific fertility rates of females in each of the reproductive ages for a specific year.