SINGAPORE Medical Group (SMG) on Thursday rose as much as two cents or 7.4 per cent to S$0.29 in early trading, after RHB initiated coverage on the specialist healthcare provider with a "buy" rating and a target price of S$0.45.
The report said that with the company's turnaround now concrete (it was facing debt and legal woes a couple years ago), its prospects ahead are bright, driven by a change in doctors' remuneration, higher operational efficiencies and a patient load that will continue to boost its utilisation rate and margins.
There are also contributions from the expansion of its new diagnostics business, and potential mergers and acquisitions of private clinics trading at lower multiples.
The change in doctors' remuneration to a more variable component, based on clinic revenue, has attracted more top-notch specialists and increased the retention rate of revenue-generating performing specialists, RHB said.
SMG further plans to continue to market on social media platforms and other avenues to attract the right clientele to boost the patient load and further improve utilisation rates and margins.
The new diagnostics business also has tremendous potential. SMG's management sees great potential and synergies in the imaging diagnostics business and has made a few acquisitions in this sector. Currently, it has three diagnostics centres in Paragon and Novena. It is likely to continue to invest more on this segment, possibly with new acquisitions and by adding machines to increase its current capacity.
"We think that besides organic growth, SMG may begin to acquire private clinics either in existing medical fields or even new medical areas. We believe that management will be prudent in making future acquisitions," RHB said.
On a valuation basis, it is also currently trading at an "undemanding" 22 times FY17 price-to-earnings ratio - that is, a deep discount of 38 per cent and 44 per cent to its local and foreign peers respectively.