Thomson Medical Group Ltd. – Credit View February 3, 2020 68

  • We take a neutral view on Thomson Medical as we expect increasing expenses and capex requirements to weigh on earnings moving forward.
  • (+) Strong operating cash flows despite declining EBITDA margins
  • (+) Strong cash position of c.S$122mn compared to short term debt of c.S$13mn, with quick ratio at 1.66x
  • (-) Capex requirements due to expansion plans likely to continue to weigh on interest coverage moving forward
  • (-) Peter Lim holds a deemed interest of 88.57% in the company

 

Company Background

Listed on the Mainboard of the SGX, Thomson Medical Group Ltd (SGX: A50) is one of Asia’s largest healthcare players specialising in obstetrics and gynaecology. It has a market cap of about S$1.6bn.

 

Principle activities:

  • Healthcare: The group owns Thomson Medical Pte Ltd (TMPL) and TMC Life Sciences Bhd (TMCLS). TMPL is one of Singapore’s leading provider of private healthcare services for women and children. It owns and operates the Thomson Medical Centre.

TMCLS is a Bursa-listed healthcare group in Malaysia. It owns and operates Thomson Hospital Kota Damansara (200 bed hospital located in the golden triangle of Petaling Jaya), TMC Fertility Centre (assisted reproduction centre) and the developing Thomson Iskandar Medical Hub (three hospitals and a long-term care facility) in Iskandar Malaysia.

 

  • Vantage Bay Healthcare City: Currently a freehold waterfront land in Johor Bahru’s City Centre. The group plans to build a regional-first integrated medical, education and wellness hub. This comprises a medical hub – three hospitals and a long-term care facility; a wellness hub providing therapeutic care and lifestyle related services, including age friendly assisted-living residences; and an education and training hub which will comprise a medical training institute and teaching hospital.

 

The Positives

+  Strong operating cash flows despite declining EBITDA margins. For the quarter ended 30 September 2019, revenue increased by 10.4% YoY to S$59.6mn, boosted by higher patient load, increased bill sizes and greater revenue intensity in the group’s hospitals and specialist clinics in Singapore and Malaysia. However, EBITDA decreased 11.9% to S$13.4mn, hampered by higher operating costs owing to cost inflation in goods, services and wages, and costs related to new clinics and the opening of Paragon Medical Centre.

We believe the cause of higher expenses is due to the group’s foray into new areas of specialties. Thomson Breast Centre and Thomson Surgical Centre were recent additions of specialty clinics at Thomson Medical Centre in Singapore.

Despite this, the group recorded higher cash flow from operations (S$24.1mn vs S$10.4mn for the 3Q19 and 3Q18 respectively), mainly from working capital improvement.

 

+  Strong cash position of c.S$122mn compared to short term debt of c.S$13mn, with quick ratio at 1.66x.

 

The Negatives

–  Capex requirements due to expansion plans likely to continue to weigh on interest coverage moving forward. The group’s main projects include a new wing at Thomson Hospital Kota Damansara for 400 additional beds and the Vantage Bay Healthcare City development. The group expects to complete the medical hub there (Thomson Iskandar Medical Hub) within 12 to 24 months after Bukit Chagar RTS station’s scheduled opening in end 2024.

EBITDA interest coverage declined from 5.40x in 2017 to 2.16x in the last twelve months (LTM) due to narrowing EBITDA margins. Interest expenses had also increased from c.S$9.9mn to c.S$25.3mn from 2017 to LTM due to higher debt levels.

 

Additional Information

*  Former CEO of Cordlife Group, Dr Wong Chiang Yin, to replace Mr Roy Quek as the group’s CEO and executive director starting from 1 February 2020. Mr Roy Quek, who quit as Thomson Medical’s CEO in September, has also quit as a non-executive director. He is leaving to pursue other interests, the company said.

Dr Wong is an independent director of RHT Health Trust and a special adviser to mainboard-listed Thomson Medical. He was the CEO of Mainboard-listed Cordlife from 2016 to 2018, and CEO and executive director of the hospital unit at Pantai Holdings.

 

*  Peter Lim holds a deemed interest of 88.57% in the company. In 2019 he was ranked the 10th richest person in Singapore by Forbes with a net worth of US$2.5 billion.

 

Comment

Although Thomson Medical generates healthy positive cash flow from operations through its healthcare business, EBIT margins have been declining and debt levels increasing as the group oversees expansion projects in Malaysia and new specialties in Singapore. We have a NEUTRAL view on the group and expect capex to weigh on earnings moving forward.

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Timothy Ang
Research Analyst
Phillip Securities Research

Timothy covers credit analysis of local and foreign bonds. Previously an equity dealer, he handled equity trade execution and portfolio management. He has presented seminars for organisations such as SIAS, SPH and IRAS, commentated live market updates for 93.8FM, and authored investment articles for the Business Times newspaper. He graduated with a Bachelor of Commerce in Accounting & Finance from the University of Western Australia.

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