• 1H FY17 Revenue/PATMI were below our expectations on slower patient volume
• Expanding paediatric segment via second clinic by Nov-2017, after first clinic in July
• Lower dividend payout of 70.2%; Declared interim dividend of 0.61 SCents per share
• Upgraded to “Buy” with lower TP of S$0.65 (previously S$0.79) on attractive valuation

The positives

• Market share for Obstetrics anchored at c.4%. SOG delivered 794 babies in 1H17, -0.9% YoY, despite -4.7% YoY dip in total number of deliveries in Singapore. Stronger performances from Gynaecology segment should continue to cushion the slower Obstetrics business in FY17e.
• Stellar results from Cancer-related segment. Profit from operations margin increased 4.6pp to 18% as all three cancer specialists gain tractions. Dr. Lim Siew Kuan is on track to turn profitable in FY17.

The negatives

• Stronger SGD against IDR and negative impact from Zika virus outbreak in Jul-Aug 2016 discouraged medical visit. Both Obstetrics and Dermatology segments were hit by lower patient loads.
• Lower interim dividend payout of 70.2% of earnings in 1H17 as compared to 82.4% in 1H16. Management shared that the 1H16 interim dividend was based on 70.5% of an inflated earnings, which did not account for: (i) quarterly accrual of bonuses and (ii) finance expense related to the acquisition of Dr. Joyce Lim’s businesses. No change in Management’s targeted interim payout ratio of c.70%.

Outlook

We are cautiously optimistic on the Group’s FY17e profitability. We are cognizant of the margin pressures arising from sluggish birth rate, slowing medical tourism, higher operating costs, and the latent period of the new Paediatric services.

Nonetheless, we remain upbeat of the Group’s ability to deliver organic growth. We deemed the slower obstetrics business in 1H17 to be a one-off event due to negative sentiment arising from an extraordinary event.  We expect 2H17 a recovery in birth numbers in 2H17 as the adverse Zika effect subsides. In addition, historically, the second half has stronger performance compared to the first half. Meanwhile, SOG has ramped up marketing activities for dermatology products and services via its internal channels. New product development or successful marketing of existing products to drive greater profitability for Dermatology business.

The Group will add its second paediatric clinic in the heartland of Tiong Bahru estate by Nov-2017. The new paediatric specialist would be able to tap onto the potential young patient pool of over 4,000* babies and adolescents within the vicinity. (*Source: 2016 Population Trends, Singapore Department of Statistics)

Upgrade to Buy with lower TP of S$0.65 (previously S$0.79) based on FY18e EPS of 2.24 SCents pegged to a lower forward PER of 29x.

We cut our FY17-18e revenue and earnings by 12% to 16% on slower patient load and margin pressures. These translate to a lower FY17-18e EPS of 1.84 SCents and 2.24 SCents. We believe that the stock has been oversold. SOG could ride through the headwinds with (i) its stable market position, and (ii) higher profitability from Cancer-related business. The Group has also been actively seeking for new recruits of medical practitioners to expand its four growth pillars. Its healthy financial position with zero debt and a war chest of S$17.65mn as at end-June 2017 enable the Group to pursue its expansion strategy, both organically and inorganically.

Potential re-rating catalysts:

• Better-than-expected margin improvement, particularly its Cancer-related segment after Dr. Lim Siew Kuan turned profitable in FY17.
• Faster-than-expected time to reach profitability for its new growth pillar.
• Expansion into complementary medical services, such as In-Vitro Fertilisation (“IVF”) to complement its O&G segment.

Figure 1: Valuation