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Broker's take: KGI initiates coverage on Singapore Medical Group with 'outperform'

KGI Securities has initiated coverage on Catalist-listed healthcare provider, Singapore Medical Group (SMG), with an "outperform" rating. 

The brokerage has a target price of 34 Singapore cents on the counter. This represents a 39 per cent upside, inclusive of a forecast dividend yield of 1.4 per cent for fiscal year 2021, KGI research analyst Amirah Yusoff said in a research note on Wednesday. 

As at 3.26pm on Wednesday, SMG shares were trading at 24.5 Singapore cents, up 0.5 cent or 2.1 per cent.  

Ms Amirah is of the view that SMG continues to gain traction in Singapore with little concentration risk and that its overseas ventures in Indonesia, Vietnam and Australia should pay off well. 

While SMG's focus remains on women's and children's healthcare, it has also diversified its revenue streams into segments such as dental, diagnostics and ophthalmology, KGI said. 

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The group's aesthetics segment includes the LSC Eye Clinic, as well as SW1 clinics in Paragon and a new outlet at OUE Downtown Gallery. SMG has two diagnostics centres under the Lifescan Imaging brand. Meanwhile, its women's and children's health segment includes brands such as Astra Women's Specialists, The Obstetrics & Gynaecology Centre and the Kids' Clinic.

"With a diverse network of specialist healthcare services in key locations such as Paragon, Punggol and Bishan, we think that the group's ability to promote cross-selling opportunities among its segments is enhanced and will be a catalyst for organic growth locally," said Ms Amirah. 

Internationally, in Indonesia and Vietnam, a booming middle class, a relatively young population, and strong economic growth will continue to boost demand for private healthcare and services beyond the essential, KGI said. 

Elsewhere in Australia, with disposable income at an all-time high and supportive government policies, fertility treatment is not only accessible, but sought after, KGI said, adding that infertility is said to affect about one in every six Australian couples of reproductive age according to Health Direct Australia.

In February this year, CHA Healthcare Singapore said it would invest S$50 million in SMG, raising its stake in the company to 24 per cent. 

"The CHA-SMG partnership continues to grow its fertility and women's health platform, further strengthening its leadership position as the largest in the Asia-Pacific region," Ms Amirah said. Most recently, CHA-SMG opened its flagship clinic at Sydney's Gateway building, and has plans to open another in vitro fertilisation clinic in Melbourne by the third quarter this year. 

"SMG has been aggressive and will continue to be aggressive in expanding its footprint across Asia-Pacific through various joint ventures and associates; with Asia-Pacific's developing healthcare landscape expanding at a rate almost double that of the rest of the world over the next decade, we believe that SMG is primed and positioned for success," the brokerage said. 

KGI's valuations assume continued organic growth in Singapore, with a one to three-month slowdown in 2020/2021, due to the impact from "circuit-breaker" measures and the closure of Singapore's borders to medical tourism.

"We assigned a fair but conservative 11 times 2021 price-to-earnings ratio based on its one-year historical average, and more than 30 per cent discount to its peer averages, as we remain cautious about the extent of impact of Covid-19 on the group's performance, in Singapore and overseas," KGI said. 

"We have also forecast for a slight drop in its dividend payout ratio for FY20F to 15 per cent from its formal dividend policy of 20 per cent, bringing the total upside including dividend to 39 per cent, based on a 34 Singapore cent target price," the brokerage added. 

This comes after SMG in May halved the planned final dividend to 0.4 Singapore cent, citing a need to save cash amid the coronavirus pandemic.

While current investor preferences lie in the medical supplies and consumables sector over the hospital and healthcare services, KGI believes that this should rotate back once the Covid-19 situation normalises in the short to medium term.

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