Thomson Medical – DMG
Valuations seem stretched
Downgrade to NEUTRAL. Thomson Medical’s share price soared 38% in the past 2 months, after having hovered around the S$0.69 – S$0.71 range since the start of 2010. It is currently trading at 19x FY10 P/E. Given that Thomson Medical is a niche O&G provider, and that growth is somewhat limited by capacity, we hold the opinion that it should trade at a discount to regional peers’ average (21x forward P/E). Based on 16x FY11 earnings, we arrive at a TP of S$0.94 (previously S$0.88). We are downgrading our recommendation to NEUTRAL.
Growth from hospital operations likely to be limited. We hold the view that Thomson Medical would be able to continue growing, supported by the improving economy and its ability to attract senior specialists from the public sector. As the economy picks up, people are more willing to turn to private healthcare. Thomson Medical is a leading private O&G provider with one of the lowest average bill size. The addition of new specialists would also contribute to growth in revenue and deliveries. However, currently running at almost full occupancy (~80%), there is only so much more that Thomson Medical can do (e.g. lowering average length of stay), in order to accommodate more patients and deliveries. Hence, we think that growth from hospital operations would be limited.
Growth to be driven by other specialised services. As a leader in women’s and children’s health, the other specialised services that Thomson Medical provides (~25% of revenue) (e.g. fertility, cancer and paediatric treatments) are also likely to continue growing. With an improving economy, patients may be more willing to spend at private hospitals. Its network of seven women’s clinics, as well as its Cancer Centre and Paediatric Centre, are expected to drive growth.
Earnings estimates raised. We have tweaked our revenue assumptions for FY10, taking into consideration higher utilisation of its facilities and services. Contribution from the new O&G specialists would boost FY11 revenue. Our margin assumptions are also adjusted, as higher utilization could help improve margins. Hence, our FY10 and FY11 earnings estimates are raised by 8% and 7%, to S$15.2m and S$17.1m respectively.