Excerpts from analysts' report

Maybank Kim Eng analysts: Gregory Yap and John Cheong, CFA

isec eye testISEC Healthcare provides a comprehensive suite of specialist medical eye care services with ambulatory surgical centres in Malaysia and Singapore. Photo: Company

According to ISEC Healthcare CEO Dr Wong Jun Shyan and Vice Chairman Dr Lee Hung Ming, the slate has been wiped clean for a 2016 rebound, driven by organic growth, end of start-up losses and M&As.

Following the acquisition of Southern Specialist Eye Centre, Malacca in Dec 2015, the pace of M&As should also pick up. Up to five are in the works, which could potentially double profits if closed.

Slate wiped clean in FY15

One year after its IPO in Oct 2014, ISEC has cleaned up its house and shut down its Mount Elizabeth Novena eye-clinic start-up that bled SGD2.6m last year. The last of Novena’s operating and renovation costs should have been fully reflected in 4Q15, after ISEC booked SGD1.3m in 9M15.

Its management had warned as far back as six months ago that Novena’s closure would hurt FY15. The write-offs would clean the slate for profits to double in FY16, potentially. While MYR weakness lingers, ISEC has shown it can overcome this even without acquisitions. 9M15 revenue from Malaysia rose 5% YoY in SGD despite a near-20% plunge in MYR. In MYR terms, the growth was a rosy 15%.


Setting the stage for FY16 rebound

With these, we expect FY16 profits to double YoY. Straightaway, the absence of Novena’s losses should plough SGD2.6m back to its bottom line.

There should also be full-year contributions from newly-acquired SSEC. Its first major accretive acquisition, SSEC is based in Melaka, Malaysia. ISEC paid MYR37m or SGD12m for SSEC: SGD5m or 43% in cash and SGD7m or 57% in shares. These were issued at SGD0.23 apiece.

We estimate SSEC’s full-year contributions at SGD1m or 15% of FY16E earnings. Return on investment is expected to be 10% vs ISEC’s WACC of 6%. There is upside potential as our forecast is conservatively based on its historical performance. Returns could potentially be higher from organic growth and/or plans to offer Lasik services in Melaka, the first in southern Malaysia. As there are no Lasik clinics south of KL, demand from the south is currently fulfilled in KL. Equipment will be transferred from ISEC Novena to SSEC.

Consolidator on the prowl

johncheong maybank9.14ISEC is the cheapest in our healthcare universe at just 15x P/E.

Maintain BUY, with target price at SGD0.40, at 27x FY16 EPS, a 20% discount to peers on account of its smaller size.

- Analyst John Cheong, CFA (photo)

Other than direct contributions, we believe SSEC is a breakout deal that will alert ophthalmology practices across South-East Asia to a well-funded consolidator on the prowl with a long-term vision compelling enough for eye doctors.

SSEC was valued at 12x historical earnings, which is expected to be the benchmark for ISEC’s future acquisitions.

In our view, ISEC has an unprecedented chance to consolidate South-East Asia’s ophthalmology market, à la dental specialist Q&M (QNM SP, BUY, SGD0.97) in the dental space in Singapore and China.

As a first-mover and market leader, ISEC should be able to attract cream-of-the-crop eye doctors. Its group-practice platform should also allow it to expand into adjacent specialties such as aesthetics as well as general practice (GP).


4 to 5 deals could close in 2016

In Malaysia, ISEC has signed three non-disclosure agreements with ophthalmology practices in Seremban, Johor Bahru and East Malaysia. In Singapore, it is doing advanced due diligence on a chain of GP and aesthetics clinics, in its first effort to diversify into complementary specialties to capture adjacent market value. In Vietnam, it has inked a new MOU with Hai Yen Group, a private company. This replaces ISEC’s lapsed MOU with Cao Thang Hospital in Ho Chi Minh City.

ISEC guides that the above deals are likely to be concluded in 2016. For prudence, we have not included them in our forecasts.


Enough cash firepower to double profits, halve valuations

ISEC had net cash of SGD27.3m as at end-3Q15. This will be dedicated to M&As. Its two practices in Singapore and Malaysia generate ample cash for working capital. Assuming the next few deals are of SSEC’s size and structured as 50% shares and 50% cash, ISEC should have enough internal resources to seal another five deals. It is mainly interested in buying established practices that can immediately add to earnings.

Assuming similar profitability per deal of SGD1-1.5m pa, its core profit of SGD6-7m could potentially double, halving its current FY16E valuation of 15x.

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