May 16, 2018

Following on the trend from 2H17, share of losses of associates/JV dropped to S$12,000, from S$48,000 a year earlier. Management indicated that this was helped by PT Citputra SMG in Jakarta (which turned profitable), share of profits from CHA SMG (Australia), offset by losses in Vietnam. Its Vietnam investment was made in January 2017, and is still in the ramping-up phase, though management opine that their optimism is based on the improving trends seen.

SMG has completed the acquisition of SW1 aesthetic clinic in April and management indicated that it is a profitable operation, with contributions to be seen from 2Q18. Recall that SW1 is operating out of Paragon in a 7,000-sqft clinic with a team of five aesthetic practitioners and one plastic surgeon. With respect to the litigation suit against the founders of SW1 (Dr Low Chai Ling and Dr Kenneth Lee), management believes that the allegations are groundless.

Going forward, we expect management to be able to continue delivering growth from the slew of business pursuits. It has opened a new O&G clinic in Paragon (March 2018) and paediatric clinic in Bedok (April 2018), increasing its O&G and paediatric clinics to 14.

It has also started its Cardiology practice and opened two new clinics, one each in Novena and Paragon, in March and April 2018 respectively. For its diagnostics segment, it expects to add an additional radiologist and a visiting consultant radiologist in 3Q18.

Share price has corrected by c.10% since the group’s 4Q18 results were released, coupled with the announcement of its 1-for-20 rights issue to raise up to c.S$11m (max of ~23m rights shares to be issued). We believe the decline in share price, in part, was also due to the weaker than expected performance in 2H17.

On the back of SMG’s 1Q18 results, we believe the growth trajectory continues to be intact, and will achieve our forecasts with ease, driven by acquisitions done last year, coupled with the continued ramp-up and operational efficiencies. We are maintaining our forecasts for now. We have factored in share base dilution from the 1-for-20 rights issue. SMG is trading at 19x/17.6x FY18F/19F PE which implies a FY17-19F PEG of c.0.6x. We maintain our BUY call and TP of S$0.73 by DBS Equity Research. Share price closed at S$0.500