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Broker's take: DBS recommends 'buy' on Singapore Medical Group

DBS Equity Research has issued a 'Buy' recommendation on Singapore Medical Group (SMG) with a target price of S$0.73 a share.

In a note published on Friday, DBS said that while SMG's FY 2017 results came in lower than expectations due to one-off costs and lower-than-expected health segment margins (38 per cent vs 42 per cent), the contribution of earnings from the group's three paediatric clinics in the second half of 2017 (H2 2017) and improving diagnostic business continued to help drive earnings in H2 2017.

DBS noted that SMG saw margin improvements across the board. For the full year, its health segment revenue grew 68.9 per cent year-on-year to S$50.5 million with gross margin improving from 30 per cent to 38 per cent with the completion of acquisition of O&G and paediatric clinics, which yield higher margins.

"Notably, post the acquisition of Lifescan Imaging and several loss-making entities, SMG continues to see strong growth for its diagnostics and aesthetics segment, with revenues growing 52.1 per cent year-on-year to S$17.1 million and gross margins increasing from 50.4 per cent to 55.5 per cent with the recruitment of a fourth radiologist.

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"We believe there is further room for the diagnostic business to grow as the 5,500-sq ft diagnostics centre at Novena Medical Hub starts to ramp up its utilisation post its opening in January 2018."

DBS added that it expects contributions from O&G and paediatrics to continue growing organically with the opening of new clinics in FY 2018.

"Inorganically, FY 2018 also represents the first year where Astra and the paediatric clinics will see a full financial year's contribution to SMG."

SMG was trading at S$0.57 a share as at 9.45am on Friday.