Thomson Medical – AmFraser

After a Long Wait, Finally in Sight

Q2 results in-line with forecast. Thomson Medical Centre (“TMC”) announced a 21% YoY rise in FY2010 Q2 revenue to S$18.87m. Together with Q1, the recent 2 quarters saw TMC’s best results since inception. ‘Specialised and other services’ segment contributed strongly mainly due to increased patient load in TMC’s Thomson Women’s Clinics, a full six months’ contribution from Thomson Women Cancer Centre (“TWCC”) and the addition of Thomson Paediatric Centre (“TPC”) which started operations on 1 Jan 2010.

Bottom line gains. NPAT increased 19.1% YoY to S$3.64m in the absence of a S$4m asset revaluation loss in the comparative quarter. Gross and net margins remain at a healthy 41.8% and 19.3% respectively. Number of babies delivered fell slightly in Q2 to 2,207 from Q1’s record of 2,478.

Synergy between core and other services. We like how Management builds on the Company’s brand name by breaking new grounds . Both the TWCC and TPC are showing promise after a few months in operations. While growing TMC’s suite of services, the tie-ups with the new senior consultants added referrals to the hospitals own services. To cater to increased demand, Management has stated plans to add 2 Operating Theatres, 2 delivery suites and 1 day surgery centre. Total capex is expected to be ~S$4m.

Vietnam venture in sight. After a slight delay, the Management has planned the soft opening of the Hanh Phuc Women and Children Hospital (“HPWCH”) in Sep 2010. This is the Company’s first overseas venture and a major milestone. To date, the main structure, exterior and helipad are largely complete. The 260-bed hospital will be launched in phases once the medical equipment are moved in. Concurrently, the Management is scouting for sites in Hanoi to build their 2nd hospital under the same consultancy contract.

Interim dividend. TMC declared an interim dividend of 1.2 SG cents per ordinary share (one-tier). This represents a 48.7% payout ratio, in line with what the Company has traditionally declared.

Downgrade to ‘ACCUMULATE’ after share price rise. The in-line results and lack of new major short-term catalyst deprive us a chance to make significant changes to our forecast. Furthermore, HPWCH will now only start contributing in FY2011. It will not be until FY2012 when the hospital gets up to speed that we expect to see major contribution. Things will get really interesting if and when TMC takes up equity stake (up to 25%) in the hospital as allowed under the contract. Considering the above, we arrive at a FV of 77 SG cents. The recent increase in TMC’s share price has moved it to within a whisker of our FV. So while we continue to like the Company, we believe the counter now merits a less compelling ‘ACCUMULATE’ recommendation.

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