• 9M FY17 PATMI met 74% of our full year FY2017 expectation. O&G and Dermatology was weaker than expected.
• Strong performance from Cancer-related segment; 9M17 profitability +107.9% YoY
• Maiden contribution from Paediatric clinic; Second clinic to commence by Nov-17
• We downgraded to “Accumulate” at lower TP of S$0.62 (previously S$0.65), implying an upside of 18.1% excluding dividend yield

The Positives

• Continued strong performance from the Cancer-related segment. Its 9M17 Profit from operations more than doubled to S$0.64mn with margin +8.8pp to 23.7%.
• Maiden contribution from the Paediatric segment with one clinic at Parkway East Medical Centre. Dr Lim Xue Yan, the new Paediatrician, benefits from the patient referrals from the two SOG clinics under the same Medical Centre. Currently, all her patients are via internal referrals. As Parkway East Medical Centre houses the Group’s top two Obstetricians, we expect (a) a secured patient pipeline to feed into the clinic; and (b) to breakeven by 1Q18 and start contributing to the Group’s bottom line by FY18e.

A second clinic, which will be located in the heartland of Tiong Bahru, will commence operations by Nov-17, servicing over 4,000* babies and adolescents (potential patients) within the vicinity. (*Source: 2016 Population Trends, Singstat)

The Negatives

• 9M17 O&G grew at marginal 1.2% YoY, weighed by slower Gynaecology in 3Q17. Nonetheless, we take comfort that the YTD market share for Obstetrics is stable at 4.2% of Singapore’s total birth, same as FY2016’s. SOG delivered 1,237 babies in 9M17, -2.4% YoY, vs -4.8% YTD YoY in overall Singapore.

Outlook

We are cautiously optimistic about 4Q17e but more positive on FY18e. Total birth numbers in Singapore for FY17e is expected to be lower than FY16’s. However, 3Q17 showed signs of recovery, both in (a) number of deliveries, and (b) local patient load in Dermatology segments. Moreover, we believe its Cancer-related segment would continue to gain traction and support the Group’s growth in FY18e. Assisted Reproductive Technology services under the collaboration with KL Fertility Centre will commence by 1Q18. (Related report: Singapore O&G – Completing the life cycle

Downgraded to “Accumulate” at lower TP of S$0.62 (previously S$0.65), based on FY18e EPS of 2.15 SCents pegged to forward PER of 29x.

We cut our FY17-18e revenue and earnings by 4-5% on slower patient load and margin pressures. These translate to a lower FY17-18e EPS of 1.76 SCents and 2.15 Scents.

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. The Group has been actively seeking new recruits of medical practitioners to expand its four growth pillars. Management targets to add 2 new specialists into the Group every year.

Potential re-rating catalysts:

• Better-than-expected margin improvement, particularly its Cancer-related segment after Dr Lim Siew Kuan turned profitable in FY17e.
• Faster-than-expected time to reach profitability for the Paediatric
• A strong demand for Assisted Reproductive Technology.
• Expansion into other complementary medical services.

Figure1: Historical PER since Jan-16

SOG is currently trading 28.42x, which is below long-term average of 33.8x.

Figure2: SOG is trading at a 5% discount to its peers average forward PER of 29.6x