Thomson delivers

TMC recorded a 16.3% YoY increase in 3QFY08 net profit to S$2.9m, on the back of a 12.9% YoY increase revenue. The results were in line with expectations. Revenue growth was boosted by the successful upgrading of some of its wards, the opening of another Thomson Women’s Clinic, the addition of a senior O&G consultant and the increase in foreign patients. Management intends to continue its upgrading programme to meet the demands of its patients and improve its performance. We maintain BUY, with a target price of S$0.76.

3QFY08 results within expectations. TMC achieved revenue of S$15.7m in 3QFY08, on the back of a 14.7% YoY increase in the number of babies delivered. The successful upgrading works of some wards in FY07 and increased patient referrals from its Thomson Women’s Clinics contributed to the 12.9% YoY increase in revenue. Although operating expenses increased,
TMC was still able to improve its gross profit margin (3QFY08: 44.8% vs 3QFY07: 44.3%) and net profit margin (3QFY08: 18.2% vs 3QFY07: 17.7%). This was helped by the fee increase which TMC implemented in January 2008.

Continued upgrading and expansion of hospital expected to boost revenue. TMC intends to push ahead with its plans to renovate its Level 3 inpatient ward in 4QFY08. It has plans to also upgrade its Level 5 into a premier ward, to meet the growing demand for premium facilities and services. This would allow TMC to raise its fees, which would contribute to further revenue growth. In order to meet the increasing demand for surgical procedures, TMC will also be adding two more operating theatres to its current four.

Outlook for both business segments remain positive. With the upgrading plans in place, the Hospital Operations and Ancillary Services segment is positioned for growth. This is underpinned by the increasing patient referrals from its expanding network of Thomson Women’s Clinics. The Thomson Fertility Centre recorded an increase in overall patient load, particularly Indonesian patients (+35% YoY). As it continues its marketing efforts in the
region, patient load is expected to rise. This would boost contribution from the Specialised Services segment.

We estimate earnings of S$11.2m (EPS: 3.8 cents) for FY08 and S$12.3m (EPS: 4.2 cents) for FY09. We have a fair value of S$0.76 for the stock, based on 19x P/E FY08/09 earnings, which is a discount to its peer average of 26x, taking into account its smaller market capitalization. We maintain our BUY recommendation on TMC.

Thomson Medical in Vietnam pact

THOMSON Medical Centre said that it has signed a subscription option agreement to take up a 25 per cent stake in a hospital in Vietnam that it helped plan.

The mainboard-listed healthcare provider did not say what the agreed price or the fair value of the hospital is. But it has been offered the same price per share as that paid for the founders’ shares.

The acquisition target is the Hanh Phuc International Women and Children Hospital. The private 260-bed hospital is located in Binh Duong province and will be completed in Q3 next year. The subscription agreement follows a five-year management contract inked in 2006 for Thomson Medical to plan and manage the Hanh Phuc hospital and two other hospitals in Vietnam.

The subscription pact was sealed between Thomson Medical’s wholly owned subsidiary, Thomson International Health Services, and Hanh Phuc International Women & Children Hospital Joint Stock Co (Hanh Phuc JSC), which owns the hospital. It may be exercised before the new hospital is three years old.

Thomson International also has a put option agreement with Prosper Joint Stock Co, a shareholder of Hanh Phuc JSC. The company has the right to sell its shares in the Vietnam hospital to Prosper JSC if its management contract is terminated during or after the five-year term. It may also do so if there is any significant change to the ownership or management structure of its Vietnamese partner.

The put option price was not stated, but it will be based on the fair value of Han Phuc JSC as assessed by an independent party jointly approved by the parties.

Thomson Medical has been making inroads into the Vietnam market in recent years. The company is planning to set up a fertility centre in Vietnam. For the six months ended February, the group posted a 28.3 per cent gain in net profit to $5.7 million.

Shares of Thomson Medical last traded at 65 cents on Tuesday.

A little more space


• In line. 1HFY08 net profit of S$5.7m (+28% yoy) is in line with our expectations and consensus.

• Revenue rose 22% yoy to S$29.5m, driven by Hospital Operations (+21% yoy) and Specialised Services (+27% yoy). Revenue from Hospital Operations rose to S$23.6m on the back of the full operation of two upgraded wards, higher baby deliveries (+15% yoy to 4,413 babies) and increased inpatient admissions from patient referrals from tenant specialists, peripheral specialists and the network of Thomson Women’s Clinics. Revenue from Specialised Services increased to S$6.0m on higher contributions from all its subsidiaries. The hospital consultancy project in Vietnam is progressing on schedule, with a further S$0.3m in consultancy fees recognised in 1HFY08 in addition to the S$0.2m recognised in FY07.

• Margin improvements. Despite higher operating expenses (including higher business costs and staff salaries), gross and net profit margins improved to 44.6% and 19.3% respectively, thanks to strong revenue and cost management.

• Operational update. The hospital is reconfiguring space previously occupied by the administrative office on Level 6, to add six patient rooms, four of which will be suites. Completion is expected at end-Apr 08. It will also continue to upgrade Level 3 inpatient wards in 2HFY08, and add two operating theatres to the current four to meet the demand for surgical procedures. The Thomson Lifestyle Centre on Level 5 will be relocated to Novena Medical Centre to make way for more clinic space. The group opened its seventh Thomson Women’s Clinic in Mar 08 and will continue to expand its network of satellite clinics. Regionally, a business plan has been completed for setting up a fertility centre in Vietnam to tap the significant unmet
demand.

• Maintain Neutral and target price of S$0.77. We have kept our earnings estimates unchanged. Our target price remains S$0.77, based on 15x CY09 P/E. Maintain Neutral on the back of potential capacity constraints in the longer term. Stock catalysts could come from regional hospital projects and management consultancy contract wins.

Thomson Medical H1 profit up 28%

THOMSON Medical Centre has posted sizable gains in interim earnings, thanks to higher patient numbers boosted by the centre’s efforts to upgrade and refurbish its hospital operations.

The group, which is a niche premium healthcare provider for women and children, reported a 28.3 per cent increase in net profit attributable to shareholders to $5.7 million for the six months to Feb 29, 2008, from $4.44 million a year ago.

Earnings per share rose to 1.95 cents, from 1.52 cents last year, while revenue grew 21.8 per cent to $29.5 million.

Thomson Medical declared an interim dividend of one cent a share. This compares with an interim dividend and a special interim dividend each of 0.75-cent a share previously. Thomson Medical shares were last traded at 62.5 cents each.

The group attributed its improved earnings performance to higher revenue contributions from its hospital operations and specialised services divisions.

It had completed the upgrading of two in-patient wards in FY2007, giving them a resort-style ambience. The full operation of the upgraded wards, more baby deliveries and increased referrals from its tenant specialists, peripheral specialists and the group’s network of Thomson Women’s Clinics also led to better utilisation of its in-patient facilities and its diagnostic and ancillary services.

The group also posted new records: it delivered 4,413 babies in the first half of FY2008, with 818 babies in November alone. Its average monthly delivery rate rose to 740 babies, from 640 babies the year before.

It also saw improved revenue takings from its subsidiaries – Thomson Fertility Centre, Thomson Pre-Natal Diagnostic Laboratory, Thomson Women’s Clinic, Thomson International Health Services and Thomson Aesthetics Centre.

And it continues to recognise fee income from its consultancy project for a private women and children’s hospital in Vietnam.

Said executive chairman Cheng Wei Chen: ‘Looking ahead, we are confident that the government’s pro-family initiatives will reap positive results.’

The group is well-positioned to benefit from this effort, increasing medical tourism, and the recent changes in healthcare policies such as means testing for subsidised care, which could potentially increase demand for private healthcare services.’

The group intends to extend its hospital upgrading programme to more in-patient wards, and will add another two operating theatres to the current four.

Thomson Medical is optimistic about doing well for the second half.

Delivering the goodies

Story: 1H08 earnings grew 28% y-o-y to S$5.7m, slightly stronger than we expected, on the back of higher revenue and improved operating margins.

Point: Revenue for 1H08 at S$29.5m was 22% stronger than 1H07 as the Hospital delivered an average of 740 babies per month compared to 640 in 1H07. TMC achieved a record 818 deliveries in Nov 2007 as the newly refurbished resort-style facilities attracted more patients. The upgraded facilities also helped to improve gross margin by 2.3 ppts to 44.6%and operating margin by 1.6 ppts to 24.1%. The Group continued to recognise consultancy fees from the Vietnam venture with a further S$0.3m being received in 1H08. It also managed to optimize space utilization as promised. With the administrative office at Level 6 moved off-site, six new patient rooms are being added, including four suites. In addition, the Thomson Lifestyle Centre on Level 5 will be moved to the nearby Novena Medical Centre to create more space for clinics. Also in line is the renovation of Level 3 and addition of two operating theatres.

Relevance: We raised FY08F and FY09F earnings by 4.6% and 3.1%, respectively, after taking into account the higher-than-expected inpatient admissions and improved operating margins in 1H08. However, we reduce our DCFbacked Target Price to S$0.77, after imputing a higher WACC of 8.0%; market risk perceptions have changed since our previous report. This translates to 19.4x FY08 earnings and 17.5x FY09 earnings, a considerable discount to other full-serviced hospitals listed in Singapore. Dividend yield in excess of 3% should also support the stock price. Hence, we maintain our BUY recommendation for Thomson Medical.