The emergence of a key 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 has lead to some retail investors crying foul. These group of retail investors thought that the terms and conditions were unfair and detrimental to them. The market seems to have reacted slightly negatively upon the announcement of this news on 20 February 2019 hence the sharp price rally of Singapore Medical Group (“SMG”) from the excellent FY 2018 results declined from a high of S$0.495 to only S$0.465 as at 23 Feb 2019.
CHA Healthcare Singapore Pte Ltd has proposed the acquisition of shares from some of the existing major shareholders and the provision of a convertible S$10 Mil Loan. CHA Singapore is an investment arm of Korean healthcare group, CHA Health Systems. CHA Group is a large healthcare group that was established in 1960. It has 10 general and specialty hospitals and 4 medical check-up centers in South Korea. It also has 2 healthcare facilities in United States.
Proposed share purchase of 83 million vendor shares for S$50Mil or S$0.605 per share.
The S$0.605 per share is an offer made to selected existing shareholders so that CHA will hold additional stakes in SMG. This is a significant premium of 30% over the closing share price of S$0.465 recently and is actually a fair valuation of SMG which has been severely undervalued by the market relative to other medical groups PE of 25 times relative to SMG’s 16 times. Upon completion of the share purchase agreement, CHA will become SMG’s controlling shareholder.
With regard to the assertion by other retail investors that the CEO,Dr Beng and Chairman, Tony Tan are planning to exit SMG and selling out the other retail shareholders, this is not true. Both Dr Beng and Tony Tan are still holding on to significant shareholdings in SMG even after the completion of the share purchase agreement with CHA Healthcare Group.
|Dr Beng and Mr Tony Tan are still substantial shareholders of SMG after partial sales of their stakes. |
I think that some of the existing group of retail shareholders have been over-reacting to this deal mainly because the S$0.605 is an offer made to only some shareholders and thus viewed as extremely unfair. However, legally speaking, there is nothing wrong with this deal as the Takeover code has not been triggered (less than 30% of total shares). No general offer is necessary. My thoughts are that this is actually a win win deal for all stakeholders.
(i) Firstly, it does strengthen the strategic alliance with CHA Healthcare Group. CHA is no stranger to SMG. Since 2017 strategic private placement of S$15Mil (@S$0.50 per share), both SMG and CHA had worked closely together on regional expansion which is one of the key reasons behind the rapid and successful year on year significant growth in business.
(ii) Secondly, the sales of the shares serve as a good reward for Dr Beng and his other management team shareholders who have contributed much to the success of SMG over the past few years. From executing the restructuring from a loss-making medical group to the current huge profits recorded, they should reap the rewards. This will only serve to motivate them to continue growing the group. S$0.605 may even have been undervalued based on the PE of 25 times for other industry peers. A point to note here is that CHA Healthcare Group will definitely ensure that Dr Beng and other key personnel continue to hold substantial stakes in SMG in order to align their interests together. Key relationships with many medical specialists are actually held by Dr Beng and his team. The success of any Medical Group also lies in the talents of the doctors that are practicing their specialties hence the retention of Dr Beng and his management team are crucial to the success of SMG.
(iii) Thirdly, there is a silver lining for all retail investors in that a real general offer may be made to all shareholders in future in the event that CHA decided to acquire the SMG business if it grew at its current pace. This is actually a strategic fit for its existing worldwide businesses.
Proposed S$10Mil Convertible Loans To Shares At Conversion Price of S$0.423
Personally, I think the conversion price of S$0.423 negotiated by Dr Beng and team with CHA is too low. But if we were to look at the broader perspective, this is a better option than calling for costly rights issue. The rationalization that I have here are from 2 angles: (1) incentivizing CHA group to take on a bigger involvement in SMG and (2) with the direct funding from CHA group on top of leftover from last year’s rights issue for M&A activities, this will free up profits for the formal introduction of a dividend policy in FY2019 to benefit all shareholders. Share prices have languished also due to the lack of patience of many shareholders on getting physical and tangible returns on their investments.
Parting Thoughts on the whole CHA deal
Risks of the business are in execution of M&A and also assuming no major fall out between Dr Beng and CHA group now that the latter has a bigger controlling stake. Liquidity of the trading of SMG are mostly very poor which means that one can get stuck holding on to too much stakes in SMG. The macro-economic conditions may also worsen and lead to losses- pls see my posting here on “Healthcare Stocks are Resilent in Earnings. Fact or Myth?”
Overall, I think that the CHA offered deals are good for SMG. Most of CHA investments in SMG are actually at S$0.50 per share (S$15Mil in 2017) and S$0.605 per share (upcoming S$50Mil in 2019). Put it this way, if I paid S$0.605 per share and the SGX traded share price is only S$0.465 per share, I will ensure I whipped the managment hard to continue growing the business as well as introduce other measures to boost shareholders value.
Also, the additional funds on offer by CHA will help to speed up the expansion and branding of SMG into one of the leading medical groups in Pan Asia.
Note: Please see here for previous Part 1 of “Hidden Gem with Explosive Growth- Potential Further Upside of 25% to 50%”.