SINGAPORE (June 18): NRA Capital likes Asian Healthcare Specialists for its highly profitable business and aggressive growth plans.
Best known for its The Orthopaedic Centre (TOC) chain of clinics, analyst Liu Jinshu says in an unrated Monday report AHS has good revenue generating ability, thanks to the popularity and skills of its top doctors.
In 1H18 ended March, each of the top four specialists earned $7,413/day or $2.7 million a year of sales, according to Liu. Factoring IPO and listing costs, Liu estimates that recurring PAT is about $3.64 million per year, on a post-listing equity base of only $12 million. This means AHS returns is greater than 20% of its equity each year.
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“The top specialists own 81.3% of TOC,” says Liu, “Hence, there is strong alignment of interests between doctors and shareholders.” As an incentive to shareholders, the group has declared an interim dividend of 0.2 cent within two months of its IPO and plans to pay out not less than 50% of FY18 and FY19 profits as dividends.
Currently, TOC only covers four subspecialties of the orthopaedic specialty. But it plans to expand the breadth and depth of its services to include e.g. musculoskeletal oncology and hand surgery.
Liu says part of its plan is to hire neurosurgeons to establish a pain management centre to complement its treatment of spine-related conditions. “We estimate that the acquisition of an existing practice with $2.75 million of revenue per year can expand core earnings per share by 24.5% in FY19, excluding IPO expenses in FY18,” adds Liu.
To be sure, AHS is helped by an ageing Singapore population. “We estimate growth in the number of elderly people to raise demand for orthopaedic services by about 9%/year over the next five years,” says Liu, “Hence, the growth potential of AHS is high if it can translate growing industry demand into revenue growth.”
Assuming at least one completed acquisition in the beginning of FY19 and organic revenue growth of 5% in 2H18 over 1H18 and in FY19, Liu estimates a valuation of 33–38 cents at 24.20 times P/FY19 E and 16.18 times EV/FY19 EBITDA.
But for now, Liu is leaving AHS unrated as he waits for evidence of organic growth in 2H18 and progress towards any M&A that would raise growth for FY19.
As at 11.34am, shares in AHS are trading at 27 cents or 5.3 times FY18F NAV/share of 5.14 cents.
