SINGAPORE MEDICAL GROUP: "Clear turnaround in core specialist healthcare segments"

"This year, we arrived at a point of inflexion as reflected with this set of financial results. Our initiatives and strategies thus far have yielded positive returns as our revenue and earnings recorded strong growth. We expect to drive the momentum into the second half of 2016.” -- Dr Beng Teck Liang, who became CEO of Singapore Medical Group in Dec 2013. (NextInsight photo)  Healthcare stocks usually command relatively high PE valuations, reflecting high investor expectations of their profitability and sustainability. The actual business performance of several Singapore-listed healthcare businesses has instead been anything but excellent. Singapore Medical Group (SMG), coming out of a few years of being low profile, has a story to tell about how it has repaired a broken business and is executing a vision that is likely to meet investor expectations. The numbers are starting to show. In 1H2016, its healthcare segment's revenue grew 43.5% y-o-y to $15.4 million. "Is this sustainable? Can we grow more? Absolutely," said Dr Beng Teck Liang, CEO of SMG, during a 1H16 results briefing. Oncology, ophthamalogy, and obstetrics & gynaecology accounted for 70-80% of total revenue. "We have been growing these areas. In each of them, a lot of people don't know that we are No.1 or 2 or 3 or 4 largest player in the private sector," said Dr Beng. SMG's aesthetics segment, facing subdued discretionary spending like many sectors of the economy, grew a modest 1.8% to $3.8 million.  Singapore Medical Group Stock Price 27 c Market Cap S$74.5 million 52-week high low 12.6 - 31 c Dividend Yield -- PE (FY16F, based on annualised EPS) 58.7x Source: Bloomberg, Company Group net profit was $830,000, compared to a $64,000 loss in 1H2015. Gross profit margin expanded from 30.6% to 33.4%. The market cheered the turnaround and the prospects. The stock surged 40% in the three trading days (from 19.3 cents to 27 cents) after the results were announced on 3 Aug.

 Dr Beng Teck Liang at a packed 1H2016 results briefing this week.
Photo by James Bywater

Diagnostics segment is exciting growth area 
 

SMG's CEO, Dr Beng Teck Liang, says diagnostics holds exciting growth prospects because it is extremely scalable.

The manpower requirements are relatively lower, and the doctors and radiologists can read the scans whereever they are done in, including overseas centres.

Saying there's big growth potential outside of Singapore, he added: "Can I take diagnostic radiology to Vietnam and Indonesia? Absolutely." 

SMG ventured into the diagnostics business segment in two steps, and have become encouraged by the turnaround of its acquisitions:

1. Through JV entity Lifescan Imaging, in August 2015, SMG acquired the radiology business of Pacific Cancer Centre for S$2.3 million cash. It thus gained access to radiology and diagnostic imaging assets, creating synergy amongst the Group’s suite of medical services.

This formerly loss-making business has been turned into a profitable entity.

2)  SMG completed the acquisition of Novena Radiology on 1 April 2016 for S$0.6 million. This gives it a footprint of 9,000 square feet in Paragon and Novena. (Notably, while chief competitor Radlink and SMG have centres in Paragon, SMG now is dominant in Novena where Radlink does not have a presence).

"We see our diagnostic business as a key growth driver for the Group with huge potential and room for expansion amidst an environment with growing demand for imaging related services."

Subsequent to the results briefing, SMG announced that it proposed to acquire the remaining 61.9% of Lifescan that it does not own.

Dr Beng spoke about expanding the diagnostics segment also through buying more equipment. Though each machine costs $1-2 million, "the good thing is that hire purchase is very easy."  

Not that SMG is short of cash. In fact, it had $7.3 million in cash versus $2.1 million in borrowings, as at end-June 2016.

Which is quite a bit for it to continue to prowl for M&A to grow its business.