Broker's take: RHB downgrades Singapore Medical Group to 'neutral'

A LACK of near-term catalysts and tepid earnings growth - both of which are likely to send stock prices sideways - has led RHB Research Institute to downgrade Catalist-listed Singapore Medical Group (SMG) to "neutral" with a target price of S$0.36.

That said, RHB analysts Jarick Seet and Lee Cai Ling noted that the stock is trading at 12.2 times price-to-earnings, a discount to its peers' average of 22 times, but there could be future opportunities to enter positions at more attractive valuations.

At 3.13pm, shares in the healthcare group were down one Singapore cent or 3.1 per cent to 31.5 cents on 371,600 shares traded.

On Monday after market close, SMG posted a 0.1 per cent dip in net profit to S$3.1 million for Q3 due to higher costs. But revenue for the period clocked in at S$24.2 million, a 9.6 per cent increase from the year-ago period due to organic growth from its health, and diagnostic and aesthetics businesses.

On the outlook for the rest of the fiscal year, SMG's management remains focused on organic growth and intends to get 10 to 12 more specialists on board by the end of the year.

RHB expects revenue growth to remain healthy, though near-term profitability growth is likely to be limited by higher costs and time required for new specialists to build up their client base.

The RHB analysts also said that SMG has yet to use proceeds from a S$9.3 million convertible loan that was drawn down in June for acquisition-related activities.

"We think that it is unlikely that any merger and acquisition (M&A) activities will happen any time soon and if any, it should have happened sooner as the funds were made available since the proposal was announced in February 2019," RHB said.

In view of the absence of the contribution from potential acquisitions in the near term, RHB has lowered its revenue forecasts for FY2020 and FY2021 by 11 per cent. Meanwhile, earnings forecasts for the respective fiscal years are lowered by 4 per cent and 5 per cent due to higher margins than previously estimated.