Since my last posting on the enigmatic case of Singapore Medical Group which was grossly undervalued by the market on 8th January 2019, the stock price has soared by an amazing 20% around the announcement period of its Q4 2018 and full-year earnings. This was a big surprise to me as I was expecting the stock to only rally 20% by end of this year due to its lack of visibility among many investors. The small positions that I have initiated thus are giving me immediate unrealized returns that will take 2-3 years to achieve if I have instead invested in pure dividend yielding stocks. The headache now is deciding whether it is time to take profit or to wait for further price appreciation. I will break down my review of Singapore Medical Group (“SMG”) into 2 separate postings as I wanted to cover on 2 major events which are potential future stock price catalyst that has suddenly emerged over the past week:
(i) The explosive growth for SMG for 3 consecutive years and future outlook and the sudden surge in share price by 20% relative to the beginning of this financial year.
(ii) The emergence of a key institutional shareholder offering to buy out part of the shares of the current management to increase its control and the offer of S$10 million dollars convertible loans to finance additional Merger and Acquisition opportunities. The market seems to have reacted slightly negatively on this news hence the sharp price rally decline from 20% to only 15% as at 23 Feb 2019 relative to the beginning of this financial year.
Explosive Growth for Singapore Medical Group For Past 3 Years
On 19 Feb 2019, SMG finally announced the long-awaited report card for its performance in Q4 2018 and full year 2018. It was an excellent set of strong results with growth of 25.1% for revenue and a 52.1% increase in net profits. Basically, SMG demonstrated that it has once again achieved double-digit growth in topline and bottom line and for 3 consecutive years. This was an extremely impressive feat and is the testament to the depth of the current senior management team in executing M&A for growth.
Future Outlook For SMG
SMG senior management team will continue to do vertical acquisitions in women’s health, pediatrics and diagnostic imaging. The directors are currently exploring opportunities to open a new breast care clinic and have identified two new specialist doctors to join them.
In addition, SMG is currently exploring opening a new imaging centre in the western part of Singapore and they will continue to explore accretive value-driven acquisition opportunities to accelerate growth and profit trajectory.
The overseas growth strategies in Vietnam, Indonesia, and Australia continued to be in place as SMG build and position itself as a pan-Asian healthcare player. SMG will also look for avenues to grow in markets such as Malaysia, Vietnam, and Cambodia.
Valuation and Price Projection of SMG
Based on its current stock price of S$0.465 per share as at 23 February 2019 (Friday) just a few days after the results announcement, I am projecting another highly probable growth of 25% for the top line and bottom line of SMG. Hence 1 year from now, the share price should appreciate in line with the business growth (proven track record of Management team) to at least S$0.58 per share.
Another method of getting the current valuation as at this juncture is to look for similar transactions. There is actually an upcoming offer by a shareholder to increase stakes in SMG via the acquisition of part of the shareholdings of the exisiting management team. This shareholder has valued the current share price at S$0.605 per share.
Some retail investors have been skeptical over the whole deal and also accuse the management team of having the intention to exit the SMG business through the sales of their stakes. Some were also extremely upset at the offer of a S$10 million dollars of convertible loans by this particular shareholder. They are crying foul over the terms offered and also suggesting other retail investors exit SMG due to diminishing prospect. I will delve more into this in my next posting but as one can see from the totally different views, valuation is a very tricky and judgemental subject. My personal view as of now remains that SMG will have another explosive year ahead with up to 25% to 50% further stock price appreciation.