UOB Kay Hian raises target price for Singapore Medical Group on potential offer

Singapore

UOB Kay Hian has maintained its "buy" call on Singapore Medical Group (SMG) with a higher target price of S$0.46 compared to S$0.37 previously, following the group's Dec 20 disclosure of a possible transaction involving the company's shares.

The stock has risen 12 per cent to S$0.33 since the announcement, although discussions remain preliminary, noted analyst Lucas Teng in a report on Monday.

Assuming a potential offer, he believes SMG should be valued at a slight premium or at least similar to its peers, given the group's expansion in high-growth markets, as well as organic growth initiatives from the addition of medical specialists.

Based on his projections, the counter is currently trading to 17 times FY2020 forward price-to-earnings (P/E) and 12 times FY2021 P/E. This comes even as SMG's 2020 earnings were impacted by Covid-19, added Mr Teng, as the group recently posted a 49.5 per cent drop in net profit for H1 2020 on lower revenue.

With SMG's management highlighting pent-up demand for elective medical services during the latest half-year results announcement, Mr Teng foresees a faster recovery in the group's patient load.

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He has raised his FY2020-2021 net profit forecasts for SMG by 4 per cent and 12 per cent respectively as a stronger-than-expected recovery for such demand could lift patient loads to 80-85 per cent of pre-Covid levels in 2021, in his view.

"Based on our channel checks, we believe demand for elective medical services remained robust in H2 2020. This could be likely due to the diversion of travel expenditure to healthcare expenditure, as well as an increasingly health-conscious population amid Covid-19. This would likely support earnings of healthcare players, such as SMG, in H2 2020," said the analyst.

"Recent offers for healthcare peers were done at 26-31 times implied forward P/E... Assuming its patient load recovers to 80-85 per cent of pre-Covid levels in 2021, SMG would still be trading at a discount to recent offer premiums as well as peers' average of 17 times 2021F P/E," he concluded.

SMG shares closed 1.5 Singapore cents or 4.6 per cent higher at 34.5 cents on Monday.