• Maintain BUY with new DCF-backed Target Price of SGD0.54, from SGD0.56, 15 % upside, to account for the CB conversion.
• Singapore Medical Group delivered strong FY18 results, with topline raising 25.1% y-o-y to SGD85m and PATMI surging 52.1% y-o-y to SGD12.9m. This was driven by organic growth and gross margin expansion due to a higher contribution of higher-margin medical streams like its rapid growing aesthetic business SW1.
• Gross margins grew to 44.4% from 42.6%.

Expanding the SW1 Brand Overseas

• Following the acquisition of the SW1 Clinic – run by the ex-founders of The Sloane Clinic – Singapore Medical Group (SGX:5OT) is also at the advanced stages of expanding its aesthetics platform into the region. Vietnam and Indonesia have been identified as natural progression destinations due to Singapore Medical Group’s existing footprint in both countries.
• Singapore Medical Group has opened a SW1 branch at OUE Downtown Gallery in Singapore to capture the office crowd, while the branch in Vietnam should commence operations by 1Q19.

Looking for Growth Overseas

• Management has stated that it is likely to focus efforts in securing growth from overseas markets, especially Vietnam and Indonesia. It would also be looking to move its Aesthetic SW1 brand to these countries by end-FY19.
• Further, it should expand the imaging and diagnostics segment into these countries as well.

CHA to Provide SMG SGD10m CL

• The purpose of the convertible loan (CL) is to expand the business and capitalise on any growth opportunities. The loan would carry an interest rate of 3.5%. Approx. 80% of the net proceeds would be reserved for M&A, while the rest should be for general business purposes.
• Assuming the loan is fully converted, Singapore Medical Group would have to issue 23.64m conversion shares to CHA Healthcare Singapore Pte Ltd (CHA) at a conversion price of SGD0.423/share. This would bring the total number of shares to 504.36m (or 4.92% of the existing share capital).

Sale of Vendor Shares to CHA

• CHA and 5 existing shareholders have entered into a sale and purchase agreement to purchase in aggregate 83m shares (approx. 17.27% of the total share capital) at the consideration of SGD0.605/share. Upon completion, CHA should hold 24.13% stake in Singapore Medical Group.
• If the convertible bond is converted, CHA stands to own 27.69%.

Maintain BUY

• We are optimistic that the synergies between CHA and Singapore Medical Group will be advantageous to the latter.

Source: RHB Invest Research - 21 Feb 2019