Singapore Medical Group (SMG SP) - Maybank Kim Eng 2017-01-23: Asset-light contender

Initiate SMG at BUY with TP of SGD0.59.
This under-researched stock focuses on premium specialist healthcare services and is set to undergo high growth from robust expansion of its seven key specialities. It offers

1. a scalable asset-light model 
2. attractive market positioning 
3. good turnaround track record and high-profile shareholders.

Its renewed growth profile stems from its earnings turnaround in 1H16, as a result of efforts from the new CEO and Tony Tan (founder of Parkway Holdings, a multi-billion dollar healthcare group today), who took over the ailing company in 2013.

Despite M& A being a key part of the company&rsquo s growth strategy, we forecast nothing in addition to those already completed  One further M& A deal could lift our FY17E EPS &  TP by at least 7%.

Scalable asset-light model

SMG&rsquo s asset-light model allows it to scale up rapidly. Since 2013, the number of doctors has risen 75% to 28. For M& A, SMG has been able to secure synergistic deals. Its successes include:

1. acquiring and turning around loss-making medical screening businesses  and& nbsp 
2. acquiring a profitable women&rsquo s specialist group made up of senior doctors at 13x P/E with 5-yr profit guarantee.

It aims to add at least SGD1m in earnings via M& A each year and it is also expanding overseas.

Attractive market positioning

SMG&rsquo s multi-disciplinary platform differentiates it from other listed healthcare players and allows it to tap more growth opportunities. It attracts young and motivated doctors, as it offers a good cross-referral network.

As the platform grows, SMG will acquire senior doctors that seek to grow their practices, like the recent proposed acquisition of Astra Women&rsquo s Specialist Group. But SMG prefers buying practices that are willing to provide mentorship and has a stable patient pool.

Under-researched  M& A potential not yet priced in

Our TP of SGD0.59 is based on 27x FY17E EPS, pegged to the average 2-yr forward P/E mean of small-cap healthcare peers in Singapore (Q& M, ISEC, Singapore O& G).

As SMG&rsquo s market recognition increases and it further establishes its growth track record, we believe it could re-rate closer to the market leader, Raffles Medical&rsquo s FY17E P/E of 33x.

Valuation cross-check using DCF indicates a TP of SGD0.56.& nbsp 

We have not factored in any future M& amp A, where a SGD1m profit deal could lift EPS by c.7%.

Risks are competition, integration risk and regulatory changes.

Swing Factors

Upside

Increasing discovery could re-rate the stock. A longerterm scenario incorporating a 33x industry leader&rsquo s P/E in FY18E EPS suggests 102% upside to a TP of SGD0.92.

More M& A: we have not factored in any future acquisitions. Every SGD1m profit acquisition could raise FY7E EPS and TP by at least 7%.

Faster-than-expected earnings growth from existing businesses and newly-acquired entities.

Downside

Failure in integrating M& A targets. Acquisition of women&rsquo s health group is SMG&rsquo s largest acquisition and integrating the business might require more resources.

Failure to maintain profitability for recently turned around businesses, as SMG might overspend on expansions.

Competition from other integrated and specialised players. They could take away SMG&rsquo s patients and specialist doctors.