“Neutral” call on Covid-19 impact and falling birth rates

KGI Securities has initiated coverage on the specialist healthcare group for women and children, Singapore O&G (SOG), with a “neutral” recommendation, and a 12-month target price of 32 cents.

“We highlight the key risks as a basis for our ‘neutral’ rating despite the inherent upside, and will re-evaluate our forecasts after 1H20 results,” say analysts Amirah Yusoff and Joel Ng in a July 3 report.

“[We are] using a very conservative 16.0x P/E as compared to its five-year average of 26.0x P/E, as we recognise that 2020’s earnings will inevitably be affected by the Covid-19 situation in Singapore. This represents a total upside of 27.6%, including FY20’s dividend yield of 3.8%,” they add.

Yusoff and Ng have forecasted SOG’s Patmi for FY2020F to be at $7.9 million, and earnings per share (EPS) of 1.66 cents.

Some of the key risks identified by Yusoff and Ng include a $11.9 million impairment from Joyce Lim’s dermatology practice in FY19, which reflects close to 50% of the total goodwill on SOG’s balance sheet as at end-2018.

Lim is one of 15 specialists practicing at SOG. Of the 15 specialists, five are senior doctors who contribute more than 50% of the group’s revenues.

Her practice is likely to be further impacted, along with the risk of impairment, by the closure of Singapore’s borders to non- essential medical tourism due to the Covid-19 outbreak.

The analysts also note that the falling birth rates in Singapore are “unlikely to increase significantly” in the short to medium term. They attribute this to societal issues that are challenging to address and resolve.

“While the Singapore government has been directing a great deal of effort and resources toward encouraging couples to start families, from grants to increasingly generous parental leave, it has yet to see meaningful change or improvements in the last few years,” they say.

“In the larger scheme of things, we note that this could threaten SOG’s core business strategy should it be unable to diversify and adapt to the changing medical landscape,” they add.

SOG’s obstetrics and gynaecology (O&G), paediatrics, and cancer-related segments continue to outperform y-o-y.

Notably, the paediatrics segment has quintupled its profits despite the team just doubling in FY2019.

Yusoff and Ng attribute the performance of these segments to being categorised under essential services and therefore having been less affected by Covid-19.

“We expect even greater results as intersegment referrals climb, and as more parents choose private hospitals and specialists,” they note.

Where possible, SOG has also encouraged tele-consultations with specialists, in an effort to provide as comprehensive a service as possible to its patients.

The analysts note that the group also has a competitive advantage with accomplished veterans in their team of senior specialists.

“Some of SOG’s doctors are also shareholders of the company, with five making up the 20 largest shareholders of the company, ensuring their alignment of interests,” they say. —