The Covid-19 surge in demand for healthcare services may be over but the industry is set to continue its growth trajectory, thanks to rising income and standards of living as well as the growth of urban populations, particularly in Asia.
As Thomson Medical Group (TMG) has stopped supporting the Singapore government in its battle against Covid-19 by setting up testing centres, vaccination centres and isolation facilities, the group is now falling back on the business it knows best — the medical speciality of women’s and children’s health.
“I believe that the healthcare industry presents itself as a very defensive growth asset (to investors), especially in Southeast Asia. Things are looking quite good,” says Kiat Lim, executive vice-chairman of TMG, in an interview with The Edge Singapore.
Although Singapore’s birth rate is declining, TMG is unfazed and is staying focused on this area as its core. Historically, TMG delivers between 8,000 to 10,000 babies each year. And based on Singapore’s annual birth rate of between 35,000 and 40,000, the group’s market share of annual births in Singapore ranges between 20% to 25%. “We don’t intend to pivot into other specialities; we are expanding our base. A good women’s and children’s hospital is a good general hospital that offers the entire spectrum of services,” says CEO Dr Melvin Heng.
Heng adds that even within the field of obstetrics and gynaecology, many adjacent specialists are required to support the entire journey from pregnancy to childbirth and post-natal care, including paediatric ENT (ear, nose, throat) specialists, paediatric cardio-thoracic surgeons for children, as well as breast and endocrine specialists for women.
TMG intends to develop deeper services to create a stickier consumer space. Lim and Heng acknowledge that many patients are not aware that TMG offers such specialities and plans to boost its marketing efforts. “Within this quarter, we are starting a new department for customer experience and patient journey. We want to be more thoughtful and focused on adding value to the patient’s overall journey instead of our different specialities working in a silo,” says Heng.
TMG is trying to capture a bigger slice of the healthcare spending from each of its patients. “We want to intensify what we are providing to our patients now and keep them in the ecosystem. We want to provide our patients with the doctors who can care for them,” says Heng, adding that the group intends to build and open up more facilities and clinics outside of the hospital that is closer to the suburban areas of Singapore for the convenience of patients. “We have to manufacture our luck,” quips Heng.
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New business opportunities
Although TMG largely operates in Singapore and Malaysia, it has identified Indonesia and Vietnam as the other Asean markets it wants to go to next. However, its management won’t be drawn into committing concrete timelines for this expansion. “Being in the healthcare space, specifically hospitals, if you have too rigid a plan to follow, you may not be able to progress or adapt as quickly. We must remain somewhat fluid and have a comprehensive plan to follow. We need a thesis that we believe will work,” says Lim, the son of Peter Lim, TMG’s controlling shareholder, who owns an 89.58% stake.
Lim emphasises that despite expansion plans, hospital assets are scarce in the market within the region. They are also very sought-after assets that get snapped up quickly. “Whenever they come up, they tend to be whatever the market gives you”.
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This year will be an “interesting” one for the industry, with several assets potentially up for sale. “I think many of the [property lease] cycles are ending. So, we will keep our eyes open. We are looking at some interesting ones to start this new journey for the group,” says Heng.
But TMG is not sitting around and “waiting for the stars to align”, says Lim. Instead, it is focusing on expanding the capabilities of its current assets, such as Thomson Medical Hospital in Selangor, Malaysia.
The healthcare market in Malaysia has grown, especially following the pandemic. TMG’s hospitals and facilities in Malaysia have “seen a lot more utilisation” from increased consultations and surgeries, and much more health screenings, says Heng.
To meet this growing market, TMG has just completed the expansion of the Thomson Hospital Kota Damansara to about 550 beds from 250 beds previously. The hospital has an adjacent plot of land that can bring the total to 850 beds under the so-called Phase 3 expansion. Thomson Hospital Kota Damansara will be positioned as the second-largest hospital in Klang Valley. “Malaysia will be a key lever of substantial growth,” says Lim.
The group intends to expand its in vitro fertilisation (IVF) centres to Malaysia and Singapore. “This is another pillar we are building up because the need for such services is increasing significantly as consumers’ lifestyles change and healthcare models evolve. So, we will continue to invest in this sector and try to grow it in our current markets and grow our presence in other parts of Asia,” says Heng. Currently, TMG has seven IVF centres, with one in Singapore and six in Malaysia.
Debt vs growth
As TMG funds its growth, it has accumulated a net debt of $481.3 million as at Dec 31, 2022, translating into a gearing of 105.7% and net gearing of 79.1%. In contrast, TMG’s FY2022 operating cash flow was $88.0 million, and its free cash flow was $64.6 million. Lim says TMG can reduce the debt load but is not in a hurry to. “We believe we can grow faster than the cost of capital but we intend to deploy capital responsibly in line with growth,” says Lim. Or as Heng adds, “there are a few more items on the list of our priorities” ahead of cutting debt.
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Many companies face higher financing costs because of higher interest rates but TMG believes this is well managed, with a third of its borrowings at fixed or hedged rates. As at end-December 2022, TMG’s cash and short-term deposits stand at $153.5 million, which the group says also provides sufficient funds to support its growth plans and seize new opportunities that may arise.
For now, funding and generating growth will take priority over reducing borrowings. “We intend to do it to a point whereby we think it is potentially time to optimise the group instead of growing even more. That period will potentially be the possible time to gear down,” says Lim.
TMG has shown it is still in the growth phase. In 1HFY2023 ended December 2022, it recorded a 26% gain in revenue to $184 million from $145.4 million in the year-earlier period. Besides overall growth in patient numbers, higher average bill sizes helped too. Earnings jumped 82.6% to $22.8 million in the same period.
By geography, revenue from Singapore rose 28% to $139 million due to an increased contribution from core services such as fertility and paediatric medicine. Service contracts for running transitional care facilities (TCFs) contributed to other revenue.
In Malaysia, revenue rose 23% to $45 million. Growth was led by higher patient loads and higher case intensity, partially thanks to the phased opening of the new wing at Thomson Hospital Kota Damansara from 3QFY2022. Licence beds have increased from 240 to 340, which is set to increase to 550 beds.
“With the easing of travel and community restrictions towards the end of 2022, we have seen a surge in demand for healthcare services due to an increased emphasis on personal health. Also, elective procedures deferred during the pandemic are now being performed. We expect this trend to continue into 2023,” says Heng.
However, expenses for the period have also increased, as manpower costs increased 27% y-o-y to $62.6 million, as the group increased the headcount required to staff the new wing at Thomson Hospital Kota Damansara, as well as to meet the demands of the competitive healthcare market with higher salary expectations. Other operating expenses also rose 11% y-o-y to $38.6 million due to increased professional fees, higher utility costs and the development of the new wing at Thomson Hospital Kota Damansara.
Although TMG’s earnings have improved, it has yet to translate into sustainable bullish action by investors. As of Feb 8, TMG shares closed at 7.8 cents, down 2.5% from a year ago, giving the stock a P/E of 32.2 times. At this level, the company is valued at about $2.2 billion.
“While we tackle manpower scarcity, and higher operating costs, our commitment to invest in digital capabilities and drive process efficiency will help us provide smooth and cost-efficient services to our patients,” says Heng.
