Abhinav Goswami Adarsh Abhineet Arindam Bhattacharjee Omer Khan Shreya Gaunekar CFA Challenge 2008 NUS Business School Analyst Recommendation to Healthway Medical Corporation Limited 9/17/2008
Healthway Medical Corp Ltd Initiation: Buy S$0.095 (16 th September 2008) Target Price: S$0.18 We are initiating coverage on Healthway Medical Corp Ltd with a Buy rating and Dec-08 target price of $0.17. While we are positive on Healthway s fundamentals, the sharp decline post the IPO launch (down 75% from its IPO price of $0.36) is due to market sentiments where newly listed firms have lack of track record which makes them less attractive to investors. Company Profile Healthway Medical Group(5NG.SI) was founded in 1990 by Dr. Wong Wing Fong and two other physicians. The company offers healthcare service across the medical value chain in Family medicine, specialist care, dental and oral care and medical aesthetics. The company s business can be categorised into: Price Movement: Source Reuters a) Primary Healthcare comprising family medicine, dentistry and healthcare benefits management and b) Specialist and Wellness Healthcare, comprising paediatrics, orthopaedics and aesthetic medicine In Singapore, Healthway Medical Group is one of the largest outpatient medical service provider as well as specialist in dental care, paediatrics and orthopaedic. Its healthcare medical services span across 11 practice groups in 80 clinical premises in Singapore. Aspiring to become one of the largest Pan-Asian medical groups, the company over years has seen organic growth, alliances and acquisitions. Healthway Medical Corporation Ltd. Opened at $0.24 in debut trade on the SGX, down 33% on an IPO price of $0.36. Healthcare Industry Outlook The renewed focus on the service sector in Singapore has provided strong impetus to the Healthcare industry to restructure the domestic economy. The strong growth of health tourism has raised healthcare s contribution to GDP to 3% from 0.2% in early part of the decade. There are underlying trends that support such strong projections: 1. Despite recessionary phase of the Global economy, Asian emerging economies continue to post strong results and the latest phase of economic expansion is likely to be consumption propelled. 2. Singapore has competitive advantage in the area of healthcare having been the medical hub for SEA which competes not on cost but on quality. Upstream, the biomedical sector will be a recurring source of new R&D projects and innovative medical treatment, the proven track record of professionalism of Singapore brand serve well particularly in healthcare, 3. The cross border travel are continues to be facilitated by improved travel links, Traditionally healthcare stocks has being regarded the classic defensive stocks on the premise that we still need medical care when sick regardless of whether the economy is doing fine or not, the fact is that this might apply more to public hospitals which typically cater to the masses (due to their affordability) and less to the private healthcare groups which are known more for specialist services, elective surgery and a general higher level of service, care and 2
prestige. Thus the private hospitals exhibit a higher degree of cyclicality that one might expect --- one might even link them directly to consumer discretionary expenditure trends. Currently in healthcare landscape of Singapore, 80% of healthcare service is provided by public sector while 20% are served by private sector. The policy by MOH instructing both private and public hospitals to state the cost structure has helped in keeping the pricing competitive both ways. Further the government regulations which in recent years have exhibited doing away with subsidy for people who can afford have shifted the affiliation of higher income group towards private hospitals. Key Investment Merits The Group expects to benefit from the increase in demand for healthcare services, especially in the specialist and wellness fields. This demand is driven by: 1. A higher incidence of diseases of affluence such as diabetes, hypertension, heart disease, stroke and cancer. 2. Singapore government s pro-family measure to promote parenthood will potentially increase demand for paediatric care. 3. Singapore s aging population and increasing immigration. 4. Approval by the Singapore government of the use of Medisave for private and public outpatient treatment of several chronic illnesses and the introduction of means testing in public hospitals. 5. Singapore s drive to position itself as a medical hub.., Singapore Family Clinic, Silver Cross, Peace, Aaron, Universal, Singapore Bd Clinic, Paediatric Centre, Island Orthopaedic, Competitive Strengths 1. Many of Healthcare s practice groups have credible track records of over 10 years which give them a strong platform to grow the business locally and overseas. 2. Their extensive and well-located network of over 80 clinics offers a comprehensive range of medical services. 3. Collectively, the Executive Directors have over 30 years of experience in the healthcare industry and in corporate development. 4. Healthway is able to provide its corporate clients and insurance companies with healthcare benefits management plans (covering primary to tertiary healthcare) and third party administration, using their proprietary information system and extensive panel of affiliated clinics. Future Plans Healthway plans to develop their Group into a leading healthcare service provider in Singapore and Asia by: Expanding and enhancing integrated healthcare services Developing and enhancing medical service delivery platform Improving the quality of their medical services Developing their existing markets and enhancing our corporate positioning Expanding overseas 3
Share price outlook We expect the Healthway s share price to trade in a narrow range over the next 9-12 months as earnings catch up with the sharp share price appreciation and the market starts to focus on earnings growth during FY08-FY09 and beyond. We advise investors to enter on declines below $0.12. We believe that the muted FY08 is a temporary blip and we expect growth to accelerate from FY-09 onwards. The strong demand environment, Healthway s strong systems, quality management, and unique customer profiling lead us to expect industry-leading 24% revenue and 44% profit CAGR in FY09-10. Key Financial Ratios Source: Bloomberg Comparable Firms Earnings Price P/E P/E-2 Thomson Medical Centre 0.033 0.59 17.88 16.88 Qualitas Medical Group Limited 0.075 0.19 2.53 1.95 Health Management International Ltd. 0.004 0.09 22.5 19.5 Raffles Medical Group 0.074 0.95 12.84 11 Average P/E 13.94 16.88 Healthway's Earnings 16 Million No of shares 1259.5 Million Healthway's EPS $0.013 Target Stock Price: $0.18 Given the current strong infusion of foreign patients, the surge in demand environment and strong growth rates of Singapore healthcare market, we have focused on P-E and EPS growth based valuation. Healthway Industry Sector S&P 500 P/E ratio (ttm) 0.03 9.36 9.09 17.93 P/BV(MRQ) 1.49 4.12 2.3 6.84 P/Cash Flow 14.4 6.53 2.6 12.01 Balance Sheet Analysis Quick Ratio 0.83 1.38 3.3 1.04 Current Ratio 0.91 1.47 3.72 1.28 Debt to Equity 24.42 245.53 19.28 197.45 Profitability Ratio Gross Margin 81.19 18.53 10.22 35.5 Operating Margin 17.31 6.04 0.36 N/A In terms of revenue, Healthway is fastest growing company in the peer group with 76% revenue CAGR over FY 05-07. Operating margins for Heathway is in top bracket when compared to the Industry and the sector. Going forward we expect, Healthway to continue margin improvement as the benefits of higher investments payoff on acquisitions increases. 4
Healthway s ROIC has increased with improving profitability. The company s ROIC at 42% is ahead of its peers. Though there was slight decline in ROIC in 2006 as Healthway was involved in acquisitions and setting up new clinics during that period. The estimated ROE will remain in middle range of the peer group due to cash infusion post IPO. ROIC ROE 2007 2008E 2009E 2008E 2009E 2010E Comparable Firms Thomson Medical Centre 33.40% 29.10% 17% 7.97% 8.01% 8.33% Qualitas Medical Group Limited 29.10% 17.10% 25% 11.99% 12.80% 13.10% Health Management International Ltd. 42% 39.90% 30.80% 154.69% 8.33% 9.09% Raffles Medical Group 37.20% 34.30% 31.40% 22.87% 24% 31% The company falls short of industry standards in terms of Financial strength ratios ( Current Ratio, Quick Ratio). Part of the raise could be the expansion plan of the operations outside Singapore. Valuation, price target, risks Our price target is based on multiple comparisons with peers (supported by DCF analysis) and values Healthway is in line with larger players (such as Thomson, Health Management International Ltd and Qualitas) due to similar market synergies and frame of reference. Key risks are High dependency on individual patients and corporate clients who opt for private healthcare services. High expenditures for overseas expansion plans and joint ventures through acquisitions, however no guarantee of commercial success in current recessionary times. High operational risk due to contingencies like outbreak of contagious diseases eg. SARS. No established efficient market for healthcare shares giving rise to high volatility of share prices. DCF Valuation Our DCF based model for Healthway assume a short term Revenue growth rate of 20% and terminal growth rate of 4%, EBIT margin of 20%, ROIC of 25%. For calculating WACC, we have used multiple regression model to come up with Equity beta of 0.4169, risk free rate of 4.49% and market premium of 8%. Further we have assumed Liquidity discount of 10% and Small stock discount of 5%. Based on these assumption our Cost of Capital comes out to be 23%, In S$ millions 2008E 2009E 2010E 2011E 2012E 2013E Revenue 94 104 116 128 143 148 Profit (Loss) 16 18 20 22 24 25 CFO 64 71 79 88 97 101 Capex (12) (14) (16) (18) (21) (22) Increase in Debt (32) (32) (16) (16) (4) FCFE 20 25 47 53 72 79 5
Short term Growth rate: 11.0% Long term growth rate: 4% Profit Margin: 20% Inflation: 5.5% Required Cost of Capital 23% Long Term Growth Rate 4% Equity Valuation (15 yrs CFs) $226.49 million Shares Outstanding 1259.50 million Target Stock Price $0.18 Financial Analysis Revenue Healthway s revenue grew by $8.98 million or 11.87% from $75.63 million in FY2006 to $84.61 million in FY2007. Both the Primary Healthcare division and the Specialist & Wellness Healthcare division contributed to the revenue growth in ratio of 55:45. Revenue derived from the Primary Healthcare division increased by $4.86 million or 12.02% from $40.44 million in FY2006 to $45.30 million in FY2007 as the number of clinics continued to grow from 58 in FY2006 to 62 in FY2007. In addition, the company enjoyed an increase in revenue in FY2007 and the full year contribution from the 11 new clinics that were opened in FY2006. Operating costs The operating costs comprised medical supplies and consumables used, laboratory and other expense, staff costs, depreciation and impairment expenses, and other operating expenses. EBIT EBIT increased by $1.79 million or 9.81% from $18.27 million in FY2006 to $20.06 million in FY2007 as a result of our total revenue growth in FY2007. However, profit before income tax margin dropped by 0.44% from 24.15% in FY2006 to 23.71% in FY2007. The lower profit before income tax margin in FY2007 was due mainly to the increase in costs. A summary of the cash flow for the financial year ended 31 December 2007 is as follows: ($ 000) FY2007 Cash flows from operating activities 19,635 Cash flows from investing activities (855) Cash flows from financing activities (6,649) Net increase in cash and cash equivalents 12,131 Cash and cash equivalents at beginning of year 684 Cash and cash equivalents at end of year 12,815 Reference: http://www.sgx.com/shareholder/ourshareholder_histchart.shtml http://finance.google.com http://finance.yahoo.com http://www.bloomberg.com http://books.google.com.sg/books?id=ft9yil1fwowc&pg=pa677&lpg=pa677&dq=healthcare +valuation&source=web&ots=haujsw1j9j&sig=lzumwiek_ldsiufihryvxm1bohm&hl=en&sa =X&oi=book_result&resnum=2&ct=result#PPA696,M1 http://info.sgx.com/webipo.nsf/dbdfe834afa2270748256dc60027fa76/c1aafb4f6a6e45714825 74780015c2ea/$FILE/HealthwayMedical%20text.pdf 6