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.

Q3 Results Stronger than Expected

• Q3 beat our forecast. Thomson Medical Centre (“TMC”) announced a 25.4% YoY rise in FY2010 Q3 revenue to S$21.8m. NPAT for the quarter came to S$4.9m, a rise of 43.5% YoY. Strong patient load and contributions from the new Cancer Centre and Paediatric Centre are helping to shape FY2010 as TMC’s strongest yet.

• Childbirths holding steady. After peaking at 2,478 births in Q1, the number of childbirths remained steady at 2,207 and 2,291 in Q2 and Q3 respectively. The economic recovery should continue to underpin revenue growth from both local and foreign patients. Management has shown great finesse and creativity in squeezing efficiency out of existing space but we should be careful when diminishing marginal returns set in.

• Brandname attracting senior specialists. 2 senior specialists commenced tenancy in May. Management had been excited about this development as the specialists would be able to increase patient referrals and utilisation of hospital services. Moreover, we believe the best people to ‘advertise’ for the Company are the senior specialists who vote with their own reputation and commitment.

• Vietnam hospital soft opening on track. TMC’s first consultancy and management project in Hanh Phuc is targeted to have its soft opening in Oct 2010. This would be well into Q1FY2011 and we already expect any meaningful contribution to come only in FY2012. Being the first of three Vietnam hospitals to be built under the agreement, there may be a learning curve to scale. We expect things to be smoother when the 2nd hospital in Hanoi comes around.

• Maintain ‘ACCUMULATE’ and raise FV to 79.5 SG cents. The stronger-than-expected Q3 leads us to raise our FY10 revenue and NPAT forecasts to S$79.0m and S$15.7m. FY11 and FY12 NPAT forecasts are also raised slightly by 2.6% and 1.8% respectively. The next significant catalyst that we expect to see on the horizon are more concrete plans for the 2nd hospital project in Hanoi. Our FV is raised to 79.5 SG cents and recommendation remains at ACCUMULATE.

Q3 Results Stronger than Expected

• Q3 beat our forecast. Thomson Medical Centre (“TMC”) announced a 25.4% YoY rise in FY2010 Q3 revenue to S$21.8m. NPAT for the quarter came to S$4.9m, a rise of 43.5% YoY. Strong patient load and contributions from the new Cancer Centre and Paediatric Centre are helping to shape FY2010 as TMC’s strongest yet.

• Childbirths holding steady. After peaking at 2,478 births in Q1, the number of childbirths remained steady at 2,207 and 2,291 in Q2 and Q3 respectively. The economic recovery should continue to underpin revenue growth from both local and foreign patients. Management has shown great finesse and creativity in squeezing efficiency out of existing space but we should be careful when diminishing marginal returns set in.

• Brandname attracting senior specialists. 2 senior specialists commenced tenancy in May. Management had been excited about this development as the specialists would be able to increase patient referrals and utilisation of hospital services. Moreover, we believe the best people to ‘advertise’ for the Company are the senior specialists who vote with their own reputation and commitment.

• Vietnam hospital soft opening on track. TMC’s first consultancy and management project in Hanh Phuc is targeted to have its soft opening in Oct 2010. This would be well into Q1FY2011 and we already expect any meaningful contribution to come only in FY2012. Being the first of three Vietnam hospitals to be built under the agreement, there may be a learning curve to scale. We expect things to be smoother when the 2nd hospital in Hanoi comes around.

• Maintain ‘ACCUMULATE’ and raise FV to 79.5 SG cents. The stronger-than-expected Q3 leads us to raise our FY10 revenue and NPAT forecasts to S$79.0m and S$15.7m. FY11 and FY12 NPAT forecasts are also raised slightly by 2.6% and 1.8% respectively. The next significant catalyst that we expect to see on the horizon are more concrete plans for the 2nd hospital project in Hanoi. Our FV is raised to 79.5 SG cents and recommendation remains at ACCUMULATE.

Thomson Med net up 39% to $4.8m

THOMSON Medical Centre (TMC), which provides private healthcare services for women and children, posted a 39 per cent jump year-on-year in net profit to $4.8 million for the third quarter ended May 31, 2010.

Revenue rose 25.4 per cent to $21.83 million on the back of robust performances by both its hospital operations & ancillary services segment and specialised & other services segment. Better margins from both operations also improved gross profit margin from 42.7 per cent to 44.7 per cent. Earnings per share for the quarter were up from 1.18 cents per share in 3Q09 to 1.64 cents in 3Q10.

‘Thomson Women Cancer Centre (TWCC) and newly started Thomson Paediatric Centre (TPC) together contributed 38 per cent of (specialised and other services) segment revenue. These results are very encouraging to us as TWCC and TPC only opened in February 2009 and January 2010 respectively,’ said Allan Yeo, group chief executive. Its seven Thomson Women Clinics (TWC) accounted for 40 per cent of revenue for the segment.

‘We continue to actively look out for new high-density areas island-wide to expand our network of women’s satellite clinics under TWC,’ Mr Yeo added.

During the quarter, its specialised and other services segment grew 68.4 per cent to $6.84 million while its hospital operations & ancillary services segment increased 12.3 per cent to $15 million. In Q310 itself, TMC delivered 2,291 babies, up 2.7 per cent from 2,231 babies in Q309.

Overseas, TMC’s consultancy and management project in Vietnam – the Hanh Phuc International Women and Children Hospital – is now slated for a soft opening in October. The group’s second consultancy project in Hanoi, Vietnam will commence after a suitable site has been found.

TMC shares closed 0.7 per cent up at $0.72 yesterday.

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.