September 6, 2019

Healthcare system revenue spiked 407% YoY or S$3.0mn to S$3.7mn mainly due to higher revenue contribution from TMJ (+S$0.6mn) and IGM (+S$2.4mn).

PT Tirta Medika Jaya (TMJ) is a renal dialysis facility in hospitals located in Indonesia (acquired April’18). Only 23 hospitals contributed to TMJ’s 2Q19 revenue of S$1.22mn, another 20 more facilities are under renovation. We expect renovations of all 43 hospitals to be completed by 4Q19 and it will have a meaningful impact to full-year earnings. Management targets to increase its existing 43 joint operation contracts with hospitals to 65 by 4Q19. We forecast FY19e revenue from TMJ to reach S$9.8mn.

PT Indo Genesis Medika (IGM) operates laboratories in collaboration with public hospitals in Indonesia (acquired May’19). The S$2.4mn contribution from IGM in 2Q19 was only for half of a quarter. With 10 out of 13 laboratories under operation (3 pending), we expect to see the full effect of IGM by 4Q19. We forecast FY19e revenue from IGM to reach S$15.0mn.

Medical clinics/centres revenue growth was relatively flat at 1% QoQ to S$0.9mn in 2Q19. The low growth was due to lower pharmacy sales in Clearbridge Medical Philippines (Marzan) as the Department of Social Welfare (DSWD) is currently streamlining and rolling out new medicine assistance schemes. Management guided that the subsidy claim receivable exposure to DSWD, is around S$200-300k. However, as compared to a year ago, medical centre revenue grew 26% YoY as the Group doubled the size of its Hong Kong clinic in May 2019 and opening of its Malaysia paediatrics clinic in March 2019. We expect the Hong Kong, Singapore and Malaysia clinics and centres to offset the temporary decline in Philippines’ contribution.

Operating expenses surged 80% YoY or S$1.0mn to S$2.2mn. This was mainly due to one-off S$0.65mn termination expense of certain employees due to the streamlining of R&D activities in the US which resulted in a decrease in the Group’s number of employees in the Clinicians/ Technologist/ Product Development function in the US. The ex-gratia payments in the form of shares and share options of Clearbridge Health Limited were finalised only in 2Q19, hence the respective expense was recognised accordingly. The remaining rise in other OPEX was due to non-recurring fair value adjustment of S$0.09mn in respect of the contingent consideration payable for the acquisition of Marzan, Medic Laser and Surgical Private Limited and TMJ and FOREX loss of S$0.14mn.

The Group raised S$11.3mn from share placement to accelerate its growth plans for its South-East Asia entities and strengthen its balance sheet. The Group is currently considering Vietnam, India and Thailand as potential ventures in the future. Management has guided that the Group is done acquiring for now and focus will be placed on net income by 4Q19.

With regards to the Hong Kong protests, management did not experience a significant drop in patient volume at its Hong Kong clinic. In fact, revenue from the Hong Kong clinic rose 20- 25% MoM since the expansion in May 2019.

The lower target price was due to the increase in number of shares as a result of the recent share placement. We believe the two primary growth drivers for CBH is the healthy underlying demand for healthcare services in the three key countries that it is operating in – Indonesia, Philippines, Singapore, and its aggressive M&A in various EBITDA accretive businesses. Despite this quarter’s miss in earnings forecast, we expect higher revenue contribution from the acquisitions and business expansions to kick-in in the second half of the year onwards to reach our FY19e earnings estimates. The full impact of the Group’s acquisitions will be seen in 4Q19. Maintain BUY with a lower TP of S$0.26 (prev TP: S$0.28). – Philip Capital

Clearbridge Health Ltd closed at: S$0.15