• 1H19 revenue made up 23% of our full-year estimates.
• Healthcare system revenue surged 407% YoY due to higher revenue contribution from TMJ (acquired Apr’18) and IGM (acquired May’19).
• Medical centre revenue grew 26% YoY as the Group expanded its Philippines, Hong Kong and Malaysia businesses.
• Loss attributable to shareholders rose by S$1.3mn QoQ, dampened by a S$1.16mn rise in operating expenses, of which S$1.11mn is non-recurring.
• Maintain BUY with a lower TP of S$0.26 (prev TP: S$0.28). The lower target price is due to the increase in number of shares after the recent share placement. We expect higher revenue contribution from the new acquisitions and business expansions to flow into 2H19. We kept of FY19e forecast relatively unchanged.

The Positive

• Healthcare system revenue spiked 407% YoY or S$3.0mn to S$3.7mn mainly due to higher revenue contribution from TMJ (+S$0.6mn) and IGM (+S$2.4mn).
  • PT Tirta Medika Jaya (TMJ) is a renal dialysis facility in hospitals located in Indonesia (acquired April’18). Only 23 hospitals contributed to TMJ’s 2Q19 revenue of S$1.22mn, another 20 more facilities are under renovation. We expect renovations of all 43 hospitals to be completed by 4Q19 and it will have a meaningful impact to full-year earnings. Management targets to increase its existing 43 joint operation contracts with hospitals to 65 by 4Q19. We forecast FY19e revenue from TMJ to reach S$9.8mn.
  • PT Indo Genesis Medika (IGM) operates laboratories in collaboration with public hospitals in Indonesia (acquired May’19). The S$2.4mn contribution from IGM in 2Q19 was only for half of a quarter. With 10 out of 13 laboratories under operation (3 pending), we expect to see the full effect of IGM by 4Q19. We forecast FY19e revenue from IGM to reach S$15.0mn.

The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity mentioned in the report.

The Negatives

• Medical clinics/centres revenue growth was relatively flat at 1% QoQ to S$0.9mn in 2Q19. The low growth was due to lower pharmacy sales in Clearbridge Medical Philippines (Marzan) as the Department of Social Welfare (DSWD) is currently streamlining and rolling out new medicine assistance schemes. Management guided that the subsidy claim receivable exposure to DSWD, is around S$200-300k. However, as compared to a year ago, medical centre revenue grew 26% YoY as the Group doubled the size of its Hong Kong clinic in May 2019 and opening of its Malaysia paediatrics clinic in March 2019. We expect the Hong Kong, Singapore and Malaysia clinics and centres to offset the temporary decline in Philippines’ contribution.
• Operating expenses surged 80% YoY or S$1.0mn to S$2.2mn. This was mainly due to one-off S$0.65mn termination expense of certain employees due to the streamlining of R&D activities in the US which resulted in a decrease in the Group’s number of employees in the Clinicians/ Technologist/ Product Development function in the US. The ex-gratia payments in the form of shares and share options of Clearbridge Health Limited were finalised only in 2Q19, hence the respective expense was recognised accordingly. The remaining rise in other OPEX was due to non-recurring fair value adjustment of S$0.09mn in respect of the contingent consideration payable for the acquisition of Marzan, Medic Laser and Surgical Private Limited and TMJ and FOREX loss of S$0.14mn.

Updates

The Group raised S$11.3mn from share placement to accelerate its growth plans for its South-East Asia entities and strengthen its balance sheet. The Group is currently considering Vietnam, India and Thailand as potential ventures in the future. Management has guided that the Group is done acquiring for now and focus will be placed on net income by 4Q19.

With regards to the Hong Kong protests, management did not experience a significant drop in patient volume at its Hong Kong clinic. In fact, revenue from the Hong Kong clinic rose 20-25% MoM since the expansion in May 2019.

Investment Actions

Maintain BUY with a lower TP of S$0.26 (prev TP: S$0.28). The lower target price was due to the increase in number of shares as a result of the recent share placement. We believe the two primary growth drivers for CBH is the healthy underlying demand for healthcare services in the three key countries that it is operating in – Indonesia, Philippines, Singapore, and its aggressive M&A in various EBITDA accretive businesses.

Despite this quarter’s miss in earnings forecast, we expect higher revenue contribution from the acquisitions and business expansions to kick-in in the second half of the year onwards to reach our FY19e earnings estimates. The full impact of the Group’s acquisitions will be seen in 4Q19.

Valuation

We used DCF valuation to fully capture CBH impressive growth over the next five years.

Overview of operations:

Healthcare system

1. Marzan – Medical centre and pharmacy business in the Philippines (acquired in January 2018 ). Marzan’s pharmacy is registered under DSWD to provide drugs at a subsidised rate to patients. Marzan’s revenue may also receive a boost, pending the approval for accreditation by the Department of Health as an approved Overseas Foreign Worker screening facility and other major Health Management Organisations for private corporate clients.

2. PT Tirta Medika Jaya (TMJ) – Renal care facilities (acquired in April 2018) located in Indonesia that offers renal care services through joint operations with equipment manufacturers and hospitals in Indonesia. The key feature of renal care is its recurrent revenue stream (dialysis is a lifetime treatment). The average utilisation rate of the renal care facilities was around 70%. Each patient requires dialysis around three times a week, 4 hours each treatment. The Group incurs CAPEX of S$60-80k to fit out each renal care centre. The Group currently focuses on ramping up occupancy instead of acquiring more contracts.

3. PT Indo Genesis Medika (IGM) – Provides laboratory services and located in Indonesia (acquired in May 2019). IGM operates laboratories with collaborating public hospitals in Indonesia under Joint Operation (JO) contracts. Currently has 13 clinical laboratories, out of which, 3 is pending contracts for novation. We expect revenue contribution from the 10 operating JOs to kick in around 3Q19-4Q19. With an estimated 2,500 hospitals in Indonesia, only 16 are class A, and CBH has a JO with 6 class A hospitals in the most affluent locations.

Medical clinics/ centres

1. Clearbridge Medical, Hong Kong – Single medical clinic in Hong Kong, which achieved rapid patient volume growth in FY18 of > 350 patients per month. Patients are mainly from China seeking health screening and vaccinations. CBH expanded collaborations with new local and Chinese agents to introduce more medical tourists from China. Renovation of the new clinic (that is double the size of the current clinic) has been completed in 2Q19 and will be able to cater to more patients. We expect higher volume from the larger clinic to boost revenue in 3Q19. The newly renovated clinic is located in the same building as the existing clinic.

2. Clearbridge Medica, Malaysia – New Paediatric clinic received MOH license and opened in March 2019. It is located in a new township with affluent middle-class young families. Revenue contribution should kick in from 2Q19 onwards. CBH has partnership with 12 GP clinics and separately, CBH is working with 6 pharmacies to market CBH’s hereditary cancer gene tests.

3. Dental Focus, Singapore – The Group owns a 51% effective interest in 9 dental clinics under the “Dental Focus” brand name with the first right of refusal to acquire another 6 dental clinics and ancillary dental services providers. The acquisition is in line with the Group’s EBITDA-focused business strategy and increases its network of primary healthcare touchpoints. The 9 dental clinics collectively generated approximately S$6.3 million of revenue in the last financial year and are profitable. The acquisition is expected to have a positive impact on the Group’s financial performance for the financial year ending 31 December 2019.

Source: Phillip Capital Research - 5 Sep 2019