Category: SG Stocks And Shares

SGstocksandshares (SGSAS) 2018-07-11 13:10:00

Singapore Medical Group (SMG)


Our View

Markets have been volatile amidst the rising political tension and the official start of a trade war between China and US. Singapore being an export driven country is likely to affected as well, with the STI currently down about 4.6% YTD, and 11% from its 52 week high. Nonetheless, it serves well for an investor with a long term investment horizon to remain focus and pick up quality stocks when the opportunity arises.

We like SMG as

·         its earnings are more domestic focus and less likely affected in a trade war (although there is likely still indirect impact, should a trade war result in a recession and possibly less demand for private healthcare vs public).

·         However, over the long term, there is still a rising demand for quality healthcare in the region amidst an aging population.

·         Share price has taken a beating of more than 40% from its highs, amidst market jitteries, medical sector currently not in play etc- such that the stock is now one of the cheapest among its local healthcare peers, and at just 14.3x FY19F PE (which is at a significant discount to historical medical sector range of about 18-28x PE.

·          It is very clear that management thinks there is value in the company and is keen to enhance shareholder return as evident from their subscription to the latest rights issue (11% premium to current share price) and exploring avenues such as share buybacks and dividends.

·         Company is still growing as shown in its latest 1Q18 results which saw new profit surged 139% yoy (FY18F EPS forecasted to grow 38% yoy, followed by 8-9% growth p.a. over next 2 years).

Nonetheless share price action continues to remain weak despite its attractive valuations. Will recommend this for long term investors with at least a 3-5 years horizon, and accumulate using a dollar cost averaging strategy (given the current weak share price action)

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SMG is a private healthcare provider based in Singapore, with 35 clinics. It is led by a group of reputable management (who successfully turned the company around from a loss in FY13 to a profit of S$8.5m in FY17) armed with an ambition for regional expansion- SMG has invested in JVs in overseas markets such as Australia, Jakarta and Vietnam.


Key business:

  1.   Healthcare: Oncology, Obstretrics & Gynaecology (O&G), Paediatrics
  2. Diagnostics & Aesthetics

Investment merits

An aging population– bodes well for rising healthcare needs in the region.


The cheapest among its local healthcare peers. Trading at 15.4x FY18F PE, 14.3x FY19F PE (EPS forecasted to grow at 8-9% p.a. for next 2 years) according to Bloomberg. This vs its local healthcare peers who are trading at 15.5x-32.3x FY19F PE. It is trading at an 8% discount to its closest competitor Singapore O&G and at the widest discount to Raffles Medical since 2016 at 14.8x blended forward 12M PE vs Raffles Medical’s 29.1x (according to Bloomberg).


Major shareholders and management show confidence in the group by taking up the recent rights issue at S$0.48/share (11% premium to current share price). While share price has went below the recent share price placement, management and Cha healthcare has went ahead to subscribe to their share of the rights, showcasing their confidence in the group’s future and expansion plans. 


SMG continues to deliver. 1Q18 Revenue (+37% yoy), Gross Profit (+47% yoy), NPAT (+139% yoy) on the back of increased revenue from both Health business segment and Diagnostics & Aesthetics business segment. Overseas operations are also starting to see improvement, as share of loss of JV and associates decreased 75% to a net loss of S$12k for 1Q18 on improvement in PT Ciputra SMG and share of profits from CHA SMG Australia Pte Ltd, offset by losses in SMG International Vietnam (where investment was made only in Jan 17, and is still in ramping up phase)

Growth set to continue- SMG opened its new 5,500 sqft center at Novena Medical center in Feb 18, and expected to add an additional radiologist and visiting consultant radiologist in cardiac and paediatrics to business in 3Q18. In Apr 18, completed acquisition of majority stake in Pheniks, operator of aesthetics and plastic surgery clinic, SW1, which will help contribute to profit and hopefully drive cross selling opportunities for SMG’s women’s health segment.
  • ·   In its latest corporate business update, the group stressed its strategy to continue its “buy and grow” strategy – which is buying  profitable business and growing it organically (as with its Astra acquisition where SMG has opened 2 new O&G clinics since) 
  • Strong growth potential overseas. For Eg. Vietnam’s healthcare market is an underserved market with number of physicians to population ratio at 0.8 per 1,000 below the OECD average of 3.3 per 1,000. SMG having identified the opportunity early, has grown its Vietnam presence to over 60 multidiscipline specialists and a team of 6 paediatricians

Improving shareholder return. While there are no firm plans announced, Management has highlighted that it is exploring avenues to enhance shareholder return including setting a formal dividend policy and share buybacks.



Do you know STI 3250 is a TURNING point?

As mentioned in my previous emails, the target 3250 was supported yesterday as predicted.

If it does not hold up at this level of 3250 by end of the day, there is a chance to move and test 3200 mark.

If it does hold up, then it should be moving within the row of 3300 and 3250 as marked on the chart.

Fundamentally looking ahead, President Donald Trump said the tariffs, which will start on 6 July, are intended to reduce China’s dominance in industries. That gives us about 1 week’s time to monitor and observe any upcoming developments of the intended tariffs. And not to mention, equity markets all over the world are facing a sell off; case in point, Dow Jones down 400 points last night.

I am forwarding some details as shared by my friends and clients, reposting below the Year lows and highs, as well as institutional buys and sells. Hope that it will be useful as a reference.

Group effort is always more efficient than individual effort, feel free to share with me too.

STI to CRASH or BULL again?

Taken from https://newsletters.tradingcentral.com/view.aspx?pk_mail_nl=1546&pk=2781066&stats_nl=1346274&token=xHnyI9NiuMck0WA51MJqKR8T2MuMndU7FUcH8%2fJ5pVlREv%2b9%2bHUIkw%3d%3dThe Straits Times index fell 0.38% or 12.6pts to 3287.4 (da…

STI 3300 mark to be broken!

Wed, June 20, 2018 This morning STI opened below the 3300 mark from yesterday. This results in a gap between yesterday’s and today’s session. Also as guessed in my previous email, it was hovering over the range of 3320 forming a temp base before m…

US China Trade War on STI 3250

Tuesday, June 19, 2018 The dollar fell against the yen in early Asian trade on Tuesday after U.S. President Donald Trump’s threats of more tariffs on China raised worries about an escalating trade war between the world’s two largest economies. As …

SGstocksandshares (SGSAS) 2018-06-06 10:53:00

AAC Tech (2018 HK)- reaching first TP


AAC Tech is having a good day today up 7% currently along with its peer, Sunny Optical, which is also up about 5%

No particular news, could be riding on the back of recent positive market actions in US, as well as recent Apple worldwide developer’s conference highlighting updates to its AR platform, and Credit Suisse’s report about smartphone demand to have bottomed out

Nonetheless after the surge, AAC is near our first TP of $131.2.
Investors may look to take some profit off, or leave a trailing stop. Our Next TP is $139.2- (17.4x FY19F PE, 12.7x EV/EBITDA) – 5 year +1SD.

Current consensus is $146.03

AAC Tech (2018 HK)


AAC Tech (2018 HK)

Noted that the name of the blog is SGstocks&shares. but cant really find anything interesting in SG, so thought of writing a fun piece on HK. This is just a summary of the (brokers) research we have read, meant as an introduction and for fun learning. 
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AAC Tech (2018 HK) – HK$118

Seems to have bottomed out and may be attractive at current levels – key risks are the maturing smartphone market. A side play on Apple as it derives about half of its profit from Apple, and supplies 50% of acoustic components to Apple


About:

major supplier of miniature electronics components to Apple, Samsung and Chinese mobile phone brands – manufactures acoustic components, such as speakers and receivers, haptics, radio frequency (RF) solutions, and microelectromechanical systems (MEMS) for electronics products, from smartphones and tablets to wearable devices.

Valuation

Currently trading at 18.3x FY18F PE, 14.8x FY19F PE – bounce off its 10year average of 13.0x. – AAC has steadily enjoyed a valuation re-rating since 2010 (PE moving higher)- has reached as high as 22x PE (implied TP: $176, 16.1x EV/FY19 EBITDA)

Our near term TP is $131.2 (16.4x FY19F PE (+1SD of 10 year range), 12x EV/EBITDA

$139.2 (17.4x FY19F PE, 12.7x EV/EBITDA) – 5 year +1SD

AAC is projected to grow at an average of 20% from FY18-FY20. – PEG of about 0.8-0.9x

Concerns priced in? AAC Tech has retraced as much as 42% from its high. Previous pullbacks (except 2008) has been up to 38.7%. The pullback may have been due to the slowdown in smartphones. AAC has also cut its CAPEX budget for 2018 by 15% – up to 50% will be allocated to expanding the optics business, 20% to acoustic products, 5% to haptics, 25% to upgrades and maintenance.

Investment merits

Has about 40% market share and is the world’s largest smartphone acoustic components supplier.

Apple supply chain proxy : Supplies 50% of Apple’s acoustic components since 2010 (Also supply Samsung since 2011) – Apple est to formed about 47% of revenue.

Andriod haptics upgrade to provide catalyst? Currently most smartphones equipped with haptic components are iphones. With the gradual removal of physical home buttons, it could lead to an upgrade haptics from android phones (which we are already seeing in likes of S9 etc) Haptics can enhance user experience on smartphones which highlight edge to edge display and AR features. Haptics & RF modules have grown to become 50% of FY17 AAC’s revenue. Analysts are expecting a 2H recovery driven by Haptics which could also help improve his margins.

One of the leading players in Optics (Smartphone AR). AAC has expanded in the WLO market 5 years ago (which are used in 3D sensor manufacturing) – has the potential to grow significantly and penetrate into Apple’s 3D sensing suppliers. Currently low competition, due to high barriers of entry 

Concerns priced in? AAC Tech has retraced as much as 42% from its high. Previous pullbacks (except 2008) has been up to 38.7%. The pullback may have been due to the slowdown in smartphones. AAC has also cut its CAPEX budget for 2018 by 15% – up to 50% will be allocated to expanding the optics business, 20% to acoustic products, 5% to haptics, 25% to upgrades and maintenance.

Risks: Customer concentration (Apple forms nearly half of revenue) Collectively, Apple, Samsung, Huawei, Oppo and Xiaomi formed about 90% of revenue. Smartphone market slowdown/slow refresh cycle, Trade war


2Q18 SGSAS FX Trading Results

Since SG market has been rather quiet, I decided to do some early accounting to tabulate the profit and loss of my FX trading this afternoon.These are my trades on EURUSD. I don’t touch other currency pairings as i do not have the time to do so. I pref…

SGstocksandshares (SGSAS) 2018-05-05 14:20:00

Sunningdale- a value stock for the patient investor

Sunningdale has fallen as much as 48% from its high following a sector de-rating and a dismal 1Q18 results. There are other reports and blogs out there citing the main reasons of why it’s a value pick. Will not go too much into it here, you can read it else where, I will just summarized the main points below, and explain the rest of our thoughts.
  1. Attractive valuation: 3-3.3x FY18-FY19 EV/EBITDA, 6.6-8x FY18-FY19F PE, with a dividend yield of 5.5%
  2.  Attractive dividend yield (rising dividend, sustainable payout ratio) – General rising trend over the years, FY17 dividend of S$0.07 translates to dividend yield of 5.5%, payout ratio of 43%
  3.  Supported by good balance sheet and good cashflow generation (net D/E of 0.3%)
  4. Reputable management with skin in the game: Mr Koh Boon Hwee, the chairman of Sunningdale, is the largest shareholder of the company with a 15.8% stake according to Bloomberg. Of noteworthy, Mr Koh’s last purchase was in Apr 17, a 12.998m shares purchase at about S$1.717/share. (This is 43% of his current position)
  5. Potential takeover target
The recent entry of another value investor, LSV asset management, is hopefully another affirmation of the potential value that is current present in Sunningdale.


Where do we think the floor is (potentially and hopefully) at? Notwithstanding a financial crisis, Sunningdale has traded at a floor valuation of  near 2.2-2.7x EV/EBITDA. We use EV/EBITDA (to take into account the gearing of the group and because depreciation is typically a huge expense to companies like Sunningdale)- this implies a potential price floor of about 0.93-1.15 (if we work back based on consensus FY19 EBITDA) that’s about 10-26% away or 10-30c away or S$20-60m market cap away. (We will look more at the 10-30c rather than the share price of 0.93-1.15, as we think there are potential for the “price floor” to be nearer.. see below)

                  













our “floor” calculation is based on EV/EBITDA, where EV (Enterprise value = Market cap + net debt + minority interest etc). 

So assuming the consensus EBITDA is correct and constant, to reach our potential “floor EV/EBITDA” our EV has to come down by S$20-60m, which could come in either of the following ways: 
  1.       Share price has to drop more (i.e. drop in market cap) or
  2.       Sunningdale has to have more cash (i.e. lower net debt), which could be potentially from

a.  Proceeds from its potential disposal of its China factory. On 25 Apr 18, Sunnningdale announced its intention to dispose of its factory in Zhongshan, as it is a non-core and excess asset. Depending on how big it is, the potential sales proceeds may help to further improve the balance sheet of Sunningdale and further lower its EV/EBITDA valuation towards our “floor” 

b.  Cash accumulated and generated from operations (which will take time) average Free Cash Flow generated/year since FY14 was S$20m. Operating cashflow/EBITDA has averaged about 80% since FY09.

S$m

FY 2013

FY 2014

FY 2015

FY 2016

FY 2017

YE 31 Dec

Net Income

13.649

27.676

42.104

39.071

31.360

EBITDA

48.635

38.018

67.812

71.479

82.125

OCF/ Net income

319%

102%

162%

138%

123%

OCF/ EBITDA

90%

74%

101%

75%

47%

Cash From Operations

43.551

28.254

68.162

53.899

38.431

Capital Expenditures

-15.764

-13.658

-24.064

-36.031

-33.871

Free Cash Flow

27.787

14.596

44.098

17.868

4.560

Free Cash Flow Yield

11.2%

5.9%

17.8%

7.2%

1.8%

Net Debt

-19.463

33.915

-1.113

-13.828

-1.601

Dividends Paid

-4.549

-5.356

-7.418

-9.335

-15.985

DPS

0.035

0.04

0.05

0.06

0.07

Dividend Payout Ratio %

39.234

26.807

22.171

28.878

27.149

Our View:

Sunningdale ticks most of a value investor checklist of having a low P/B (0.6x), low PE (6-8x PE), good balance sheet (nearly 0 debt), good cashflow generation, good dividend yield and a reputable and good management with stakes in the company. 

Investing is about following your investment checklist and buying good companies when its out of favour (sentiments etc) 
When we look at Sunningdale now, the sector and the company is out of favour but do we think the sector will be in play again 1 day? (yes) 
Do we think the company can get out of its current rut? 
we dont know, but we think it can. The 1Q18 results is bad on first glance (-75% yoy) but its not end of the world. It is partly due to forex loss (excluding which, results is still -25%yoy to S$7m,  due to lower consumer/IT sales from lower demand etc which had a double whammy effect as margins took a hit with the lower utilisation) Manufacturing is a cyclical sector- i think the more important question is if Sunningdale are reacting quick and enough to customers and are they maintaining and gaining new projects? From the results commentary, i think they still are.. as they cited a stable order book, and continued business enquires from new and existing customers and potential new projects which will be commencing mass production. They are still continuing investing in new technology and machinery to be cost competitive, and building new manufacturing sites to be near customers (sounds reasonable and sensible to me)

In our short investing journey in the local market, (we think) there are less and less manufacturing companies listed in Singapore as we see them gets privatised and/or taken over. This could be either due to low valuations of Singapore manufacturing co. (relative to likes of HK etc) and/or consolidation of the industry as customers nowadays look to consolidate their suppliers (deal with a few rather many).  M&A activity is likely to continue as the industry consolidates and existing players look to grow their economies of scale.

That is why we think 

Sunningdale being one of the largest plastic precision companies in the world serving a diversified group of MNC customer base (no one customer forms more than 5% of the group’s total sales) makes them an attractive M&A target (for its scale and wide network of customers) one day. Even if they are not being acquired, they may also take the chance to buy over another company should the opportunity arises as with the case of First Engineering in late 2014, growing its profit and hopefully consequently their market cap and dividend.

Prices have found abit of a base here after falling more than 48%, and the emergence of some value back to the stock. If we assume a “floor” valuation based on EV/EBITDA, hopefully a floor is in sights, and may be even nearer should the disposal of Sunningdale’s China factory happen and be of a significant size. Even if it doesnt, Sunningdale has proven in the past to be highly cashflow generative which could help accumulate cash in its balance sheet and move it closer to its “floor valuation as time passes” 


Will buy some here, but leave some spare bullets. Remember this is still a very cyclical sector that is very dependent on the economy strength (there have been increasing concerns of a recession lurking around despite the current strength in the global economy), and not to mention how fragile the market has been recently. Investors have to take a medium- long term view on this, as we wait for earnings to hopefully recover (led by a respectable management) and the sector to be in play again