• Upgrade to BUY from Neutral, SGD0.62 Target Price offers 22% upside with 5% FY19F yield.
• TALKMED GROUP LIMITED (SGX:5G3)’s 1Q19 earnings surged 23.7% y-o-y, while revenue/PATMI grew 40.7%/23.7% y-o-y, mainly on the return of key contributor and CEO, Dr Ang Peng Tiam.
• We expect revenue and earnings to continue improving in subsequent quarters, while contributions from Dr Ang should also grow and reach pre-suspension levels.

Losses From Associates Significantly Reduced; More Time Needed

• We note that losses from associates – mainly from the Hong Kong Integrated Oncology Centre (HKIOC) and Integrated Imaging & Endoscopy Diagnostic Centre (HKIEDC), of which TalkMed owns 30% – have decreased greatly by 49% y-o-y. We expect them to be in the black by 2H19, ie longer than we initially expected.

Huge Potential in Mesenchymal Stem Cells (MSCs)

• MSCs are now used in regenerative medicine and therapy overseas, for aesthetic as well as other purposes. Management believes that there is huge potential in this area. Its 60%-owned subsidiary, Stem Med Pte Ltd (Stem Med), has embarked on a research and clinical programme for MSC use in the region. However, we understand that, in Singapore, cellular therapy can only be approved under the auspices of clinical trials. As such, the main monetisation of these therapies in Singapore will likely only come when regulations are altered.

Earnings Momentum Gains Traction; Now a BUY

• TalkMed’s earnings recovery has picked up pace, especially in 1Q19, and we understand that Dr Ang’s utilisation rate has increased significantly y-o-y. As he is a key contributor to the company’s earnings, we expect subsequent quarters to continue to show strong earnings growth as his utilisation rate increases further, together with net margin improvement.
• In addition, dividend yield should also pick up to around 4.8% this year, as earnings grow. TalkMed pays out 70-80% of its PATMI. As a result, we upgrade our call from NEUTRAL to BUY, while our DCF-backed Target Price remains unchanged, at SGD0.62.
• Key risks include the non-renewal of its consultancy restatement agreement.

Source: RHB Invest Research - 29 Apr 2019