By Ernest Lim

This week, Singapore Medical Group (SMG) caught my attention.

SMG has dropped 39 percent from $0.725 on 18 July 2017 to close $0.440 on 3 October 2018. My personal guess is part of the fall may be attributable to:

  1. Lower, or no earnings growth for some of the healthcare players in FY18. However, this is not the case for SMG, as analysts believe SMG is on track for a minimum 40 percent growth in FY18 net profit. It is noteworthy that SMG already posted a 70 percent jump in 1HFY18 net profit;
  2. Reduction in the general price-to-earnings valuations ascribed to the healthcare sector;

So, what caught my attention?

Positive chart: SMG is testing its downtrend line established since 26 January 2018 (See Chart 1 below). Indicators such as OBV, RSI and MACD are strengthening. ADX has started to rise and last trades at 22.6 on 3 October 2018 amid positively placed Dis, indicative of a trend. 20D and 50D EMA have stopped their declines and are tapering. A sustained breach of the downward trendline (currently around $0.445 with volume expansion is positive. Conversely, a sustained breach of its 52-week low $0.415 with volume expansion is bearish. On balance, chart looks poised to breach its downward trendline in the next couple of months.

Near term supports: $0.440 / 0.430 – 0.435 / 0.415 – 0.420

Near term resistances: $0.445 / 0.455 / 0.470 – 0.475 / 0.480 – 0.485

Chart 1: Testing Downtrend With Strengthening Indicators

chart 1

Source: InvestingNote 3 October 2018

  1. Cheap valuations compared to peers: SMG is trading at 14 times forward-FY19 PE vis-a-vis sector average 29 times forward-FY19 PE. Although SMG has a smaller market cap relative to some of its peers, it has a high earnings growth rate;
  2. On a price basis, SMG is near the 52-week low of $0.415. 52-week high is S$0.645;
  3. Based on Bloomberg (see Figure 1 below), average analyst target price based on Bloomberg is $0.650. This represents a potential capital upside of around 48 percent;

Fig 1: Bloomberg analyst compilation

chart 2
Source: Bloomberg 3 Oct 2018

  • Based on SMG’s 2Q18 results, it mentioned that it continues to explore various avenues to enhance shareholder value and possible corporate actions that may unlock value for shareholders. Such actions may include a possible formal dividend policy in FY19 and a share buy-back mandate, subject to all necessary approvals and compliance. Although I do not know how long such initiatives will take to materialise, it is still comforting to note that company does take note of shareholder value;
  • SMG also mentioned in their 2Q18 results that they are likely to continue their growth in 2H18 as they hired more specialists and open new clinics in Singapore. It also plans to scale their Aesthetics platform, SW1 overseas likely in Vietnam, and Indonesia.
  • Raffles Medical, arguably one of the leaders, if not the leader, has breached its trading range of $1.00 – 1.14 with volume expansion on 1 October 2018. If Raffles Medical continues to move, this may fuel some interest in other “cheaper” healthcare plays (with earnings growth) too.

 

Risks

  •  As of now, SMG is not giving out any dividends yet; i.e. no dividend return based on now;
  • There is a possibility that doctors may leave SMG once their lock out periods end;
  • Slowdown in medical tourism;
  • I have no direct access to management and not extremely familiar in their business;
  • SMG is illiquid. Average 30-day volume is around 159,000 shares per day only. i.e. Not easy to enter or exit;
  • Chart reading is subjective. There is no guarantee that SMG may rally even if the downtrend line is breached on the upside;
  • Execution risk in their “acquire and growth” strategy where profitable businesses are acquired with the aim to grow and expand through further organic growth initiatives.

Readers who wish to know more on SMG can refer to SGX for more information and HERE for the analyst reports.

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

P.S: I am vested in SMG for a potential trading play and aim for a few bids of profit if any. I have highlighted SMG to my clients yesterday. Do note that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements.

Disclaimer

Please refer to the disclaimer HERE

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