Broker's take: KGI 'neutral' on Singapore O&G, cites risks from skin clinic, falling birth rates

KGI Securities on Friday initiated coverage on specialist medical and surgical group Singapore O&G (SOG), which caters to women and children, with a "neutral" rating and a 12-month target price of 32 Singapore cents.

The Catalist-listed counter was trading at 25.5 cents as at 3.39pm on Friday, down 0.5 cent or 1.9 per cent.

KGI said that despite the inherent upside, there are key risks - such as declining birth rates and a possible further impairment from a skin clinic - which formed a basis for its "neutral" rating. The research team will reevaluate its forecasts after SOG releases its financial results for the first half of this year.

SOG remains a key player among women's healthcare providers, with a relatively strong and stable market share since its initial public offering in 2015.

"Its obstetrics and gynaecology (O&G) specialists continue to outperform, delivering close to 9 per cent of all private hospital deliveries," analysts Amirah Yusoff and Joel Ng wrote. The group's O&G segment brought in close to 55 per cent of last year's revenues.

SOG's paediatrics and cancer-related segments have also been outperforming year on year, with paediatrics' profits almost quintupling despite the team just doubling in size last year.

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"These are the synergies that have been developed as a result of expansions within the women's and children's healthcare vertical," the analysts said.

"We expect even greater results as inter-segment referrals climb, and as more parents choose private hospitals and specialists," they added. These segments have also been less affected by the coronavirus pandemic because most of the services are considered essential, catering to people such as mothers-to-be and cancer patients undergoing treatments.

KGI noted that SOG's competitive advantage lies in having many senior specialists who are accomplished veterans in their fields with decades of experience and are trusted by many.

Of the company's 15 specialists, five are senior doctors who contribute more than half of group revenues.

In terms of key risks to the company, KGI pointed out that Joyce Lim's dermatology practice had to recognise an impairment charge of S$11.9 million last year - close to half of the total goodwill on SOG's balance sheet at end-2018 - as the business faced headwinds in an increasingly competitive landscape.

Dr Lim's practice will also be further affected by the closure of Singapore's borders to non-essential medical tourism, which means the risk of further impairment remains, the analysts said.

This is especially so considering the downtrend in the dermatology segment's profits even before the Covid-19 outbreak in Singapore and neighbouring countries, with its 2019 profits being less than half of that in 2018.

Another key risk lies with the general downward trend in Singapore's birth rates, which are unlikely to increase significantly in the short to medium term mainly due to societal issues that are challenging to address and resolve, KGI wrote.

"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," it added.