HC surgical (S$0.67; mkt cap: S$100m)
FY18 PE: 22.4x, Dividend yield: 3.1%, Net cash, Free cashflow yield: 5.8%
While notably HC Surgical is not cheap at 22x FY18 PE, when compared to its peers like Singapore Medical Group or Singapore O&G who are trading at 15-19x FY18F PE. However, we thought it is worth keeping it in our watchlist given the recent surge in FY18 profit which was driven by both organic and inorganic growth. The group has done a series of acquisitions in the last 2 years, which showcased its ambitions for expansion, and potential for further earnings growth going forward.
Why we think it looks potentially interesting-
The (opp of) law of large numbers. HC surgical caught our eye due the surge in revenue and profit for FY18. Its adjusted net profit to owners surged 60% yoy on both organic and inorganic growth. Despite the strong growth, its net profit is still relatively small (when compared to its SG listed peers with profit of S$8.5-32m) at S$4.47m. If we believe in the law of large numbers (which states that small cap companies have more room to grow (at a faster rate) than larger market cap), then it is worth digging abit further into HC Surgical’s growth plans to see if that growth is sustainable, and if it can grow into at least the size of its closest competitor whose profits are 90% larger than them now.
Since its IPO in just 2 years, HC Surgical has done a series of (small) acquisitions,
- The price tag are typically less than S$5m each (The largest one seems to be Medinexdone at S$4.3m), which we think showcase the company’s prudent investment approach (it is likely more easy to integrate smaller companies than larger ones, even if it fails, the financial impact on the group will not be as huge). Collectively, these (along with organic growth) have helped HC grow their profit by more than 60% from FY16 (S$2.7m) to FY18’s (S$4.5m). These acquisitions include Specialists, GPs and medical support services (Medinex).
- While this is a bit of a crude way of calculating, if we roughly add up all the announced acquisitions/investment consideration (about S$12.2m) and divide it by the increase in profit from FY16-FY18 of about S$1.8m, the PE from the acquisitions are about 7x- which is very value accretive (given despite the de-rating in the medical sector, medical listed peers are still trading at least 15x PE)
Growth plans looks likely to continue, given HC Surgical continue to add another specialist in May 18 and formed a joint venture with a GP group, Island Family In Feb 18.
FY18 results: Revenue +69%; Adjusted net profit to owners +60% yoy to S$4.47m; Total Dividend: S$0.021
The surge in revenue and profitability was due to both organic and inorganic growth (full 12 months consolidation of specialists, GP and medical support services acquired during FY17 and FY18)
Free cash flow generation is also strong (most likely due to nature of business), with S$5.8m of free cash flow generated for the year (Operating cashflow – Acquisition of PPE) translating to a free cashflow yield of 5.8%.
The strong free cashflow underpins the ability of HC Surgical to return value to shareholders, where it has declared a total dividend of S$0.021 for FY18 (70% payout ratio) translating to a dividend yield of 3.1%.
Net cash balance sheet