Thomson Medical – CIMB

There’s demand, but where’s the space?

2008 outlook

Higher baby deliveries and inpatient admissions expected in 2008, on the back of: 1) increased patient loads seen by tenant specialists, peripheral specialists and the network of Thomson Women’s Clinics, with another clinic to be added in 1H08; 2) TMC’s strong branding and reputation as the only private women’s and children’s hospital in Singapore; 3) the government’s marriage and procreation incentives; 4) an immigration boom, especially of skilled professionals of reproductive age; and 5) a still-healthy Singapore economy and relatively robust regional economies.

Room to raise rates. TMC renovated two wards this year and will be renovating another two in FY08. After renovation, it will be positioning one as a premium ward. With its fees among the lowest of the private hospitals, there remains much potential for fee hikes, particularly with its enhanced facilities.

Still room to grow? TMC’s hospital is near full occupancy at more than 80%. While it has actively rationalised space to create additional capacity and increased patient admissions by encouraging patients to be discharged earlier, we remain cautious that capacity constraints could limit its longer-term growth.

Recurring fee income from Vietnam project. We expect the group to receive US$0.5m and US$0.3m in consultancy fees in FY08 and FY09 respectively. Upon completion in 2009, the group will manage the Vietnam hospital for five years with the option for another five. Hospital management fees are typically 2-4% of revenue and 3-5% of net profit. We have not imputed fee income from hospital management in our forecasts as details are not yet available. Further upside could come from the exercise of a second option to take an equity stake of up to 25% within three years from the commencement of operation. In addition, management announced in Nov 06 that it would be undertaking project-consultancy contracts for two more greenfield women’s and children’s hospitals within the next 18-36 months on an exclusive basis.

Valuation and recommendation

Target price reduced to S$0.77 from S$0.88; downgrade to Neutral from Outperform. We have reduced our earnings estimates by 5-10% for FY09-10 on the back of potential capacity constraints (lower number of beds assumed). Following this, our target price has been lowered to S$0.77 from S$0.88, based on 15x CY09 P/E, still a 15% discount to the peer average. Stock catalysts could come from: 1) regional hospital projects and management consultancy contract wins; and 2) significant capacity expansion.

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