HEALTH MANAGEMENT INT'L: UOB KH's Key Mid-cap Healthcare Pick

Excerpts from UOB Kay Hian's report

Analyst: Andrew Chow, CFA

Health Management International (HMI SP) Homecoming; Our Key Mid-cap Healthcare Pick CFO Chin Wei Yao and sister Chin Wei Jia, theCEO.NextInsight file photo. HMI’s latest venture into ambulatory care rides upon the latest growth trend in outpatient procedures. The centre builds upon the group’s regional focus and expansion on the local front. We trimmed our FY19-20 net profit forecasts by up to 3.6% due to higher interest expenses. Maintain BUY with a revised DCF-based target price of S$0.82. (from S$0.83)

WHAT’S NEW

• Company update. This report highlights our latest views on Health Management International (HMI) post its acquisition of a 62.5% stake in StarMed@Farrer Square.

• Recap of transaction. The group recently announced that it acquired a 62.5% stake in StarMed@Farrer Square which owns the new proposed day care-surgery and multi-disciplinary medical centre named StarMed Specialist Centre (SSC).

HMI’s total commitment for this investment is S$40m, which comprises: a) S$6.9m for a 62.5% stake and an existing S$10m shareholders loan, and b) new shareholders loan of S$1.9m and a proportionate guarantee that is limited to S$31.2m for loan obligations of SSC, including existing mortgage term loans. The start-up SSC is expected commence operations in 2H18, subject to regulatory approvals.

• Homecoming. HMI’s acquisition will give it a stake in Singapore’s first private one-stop ambulatory care centre, with the initial focus on cardio-vascular, digestive, minimally invasive surgeries and diagnostic services.

SSC, aims to offer quality clinical services at competitive private sector prices. The centre is conveniently situated above Farrer Park MRT station and co-located with the 300-room Park Hotel Farrer Park.

SSC spans approximately 16,000sf across four floors. The investment, in our view, is positive as HMI will have a presence in Singapore, which is a key healthcare hub in the region.

• Good prospects for ambulatory care. While the new facility in Singapore is small in scale compared to HMI’s core hospitals, it aims to tap the growth in demand for day surgeries which comes on the back of rising healthcare expenses, the bed crunch at government/restructured hospitals and patient preference for convenient same-day discharge.

VALUATION/RECOMMENDATION • Maintain BUY with a revised DCF-based target price of S$0.82. We remain positive on HMI’s growth outlook given the group’s expansion plans and strategic acquisition. However, we cut our target price slightly by 1% from S$0.83 to S$0.82 after our earnings forecast revisions. While the SSC investment will only be accretive in the medium-term, we view the investment to be strategic as it will allow HMI to extend its footprint in Singapore and the long-term prospects for ambulatory care are promising. -- Andrew Chow, CFA (photo), Analyst, UOB Kay Hian

We understand that the growth of day surgeries has outpaced inpatient procedures with a 16-year CAGR of 7.6% compared to 2.1% for inpatient procedures.

In addition, according to the Singapore Department of Statistics and a BMI report, day surgical procedures in Singapore accounted for 37% of total surgeries in 2016, which compares to 65-80% in developed countries such as the US and UK.

• Financing the expansion. The group will inject an additional S$1.9m shareholders loan to support business start-up while assuming obligations of up to S$31.2m worth of loans, proportional to its shareholding.

The total cash consideration of S$8.8m will be funded from proceeds of Heliconia Capital Management’s S$11.0m placement in Nov 17. On our estimates, assuming the total commitment of S$40m is consolidated, HMI’s FY19 net gearing will rise from 27.4% to 38.2%.

• Continued strong growth in foreign patient load at Mahkota Hospital. Foreign patient load continues to pick up at the Mahkota Hospital though the extension to its East Wing is not yet completed. We understand growth in foreign patient loads at Mahkota Hospital continues to outpace local patients, a continuing trend from the previous quarter.

EARNINGS REVISION/RISK
• Slight cut in earnings forecasts pending final results. We have trimmed our FY19-20 net profit forecasts by up to 3.6% to build in higher interest expense after the acquisition of SSC. 4QFY18 results are expected to be released on 24 August.

However, we note that there is potential downside to our FY19 estimates on upfront/opening losses when SSC commences operations in 2HCY18 as we forecast it would need at least two years to breakeven. Given the lack of details at this stage, we have not factored this in.

Full report here.