Hidden Gem with Explosive Growth- Singapore Medical Group S$10Mil Shareholder's Loan for M&A (Part 2)

The emergence of a key shareholder offering to buy out part of the shares of the current management to increase its control and the offer of  S$10 million dollars convertible loans to finance additional Merger and Acquisition opportunities has lead to some retail investors crying foul. These group of retail investors thought that the terms and conditions were unfair and detrimental to them. The market seems to have reacted slightly negatively upon the announcement of this news on 20 February 2019 hence the sharp price rally of Singapore Medical Group ("SMG") from the excellent FY 2018 results declined from a high of S$0.495 to only S$0.465 as at 23 Feb 2019.

CHA Healthcare Singapore Pte Ltd has proposed the acquisition of shares from some of the existing major shareholders and the provision of a convertible S$10 Mil Loan. CHA Singapore is an investment arm of Korean healthcare group, CHA Health Systems.  CHA Group is a large healthcare group that was established in 1960. It has 10 general and specialty hospitals and 4 medical check-up centers in South Korea. It also has 2 healthcare facilities in United States.

Proposed share purchase of 83 million vendor shares for S$50Mil or S$0.605 per share.

The S$0.605 per share is an offer made to selected existing shareholders so that CHA will hold additional stakes in SMG. This is a significant premium of 30% over the closing share price of S$0.465 recently and is actually a fair valuation of SMG which has been severely undervalued by the market relative to other medical groups PE of 25 times relative to SMG's 16 times. Upon completion of the share purchase agreement, CHA will become SMG's controlling shareholder.

With regard to the assertion by other retail investors that the CEO,Dr Beng and Chairman, Tony Tan are planning to exit SMG and selling out the other retail shareholders, this is not true. Both Dr Beng and Tony Tan are still holding on to significant shareholdings in SMG even after the completion of the share purchase agreement with CHA Healthcare Group.

Dr Beng and Mr Tony Tan are still substantial shareholders of SMG after partial sales of their stakes.  

I think that some of the existing group of retail shareholders have been over-reacting to this deal mainly because the S$0.605 is an offer made to only some shareholders and thus viewed as extremely unfair. However, legally speaking, there is nothing wrong with this deal as the Takeover code has not been triggered (less than 30% of total shares). No general offer is necessary. My thoughts are that this is actually a win win deal for all stakeholders. 

(i) Firstly, it does strengthen the strategic alliance with CHA Healthcare Group. CHA is no stranger to SMG. Since 2017 strategic private placement of S$15Mil (@S$0.50 per share), both SMG and CHA had worked closely together on regional expansion which is one of the key reasons behind the rapid and successful year on year significant growth in business. 

(ii) Secondly, the sales of the shares serve as a good reward for Dr Beng and his other management team shareholders who have contributed much to the success of SMG over the past few years. From executing the restructuring from a loss-making medical group to the current huge profits recorded, they should reap the rewards. This will only serve to motivate them to continue growing the group. S$0.605 may even have been undervalued based on the PE of 25 times for other industry peers. A point to note here is that CHA Healthcare Group will definitely ensure that Dr Beng and other key personnel continue to hold substantial stakes in SMG in order to align their interests together. Key relationships with many medical specialists are actually held by Dr Beng and his team. The success of any Medical Group also lies in the talents of the doctors that are practicing their specialties hence the retention of Dr Beng and his management team are crucial to the success of SMG.

(iii) Thirdly, there is a silver lining for all retail investors in that a real general offer may be made to all shareholders in future in the event that CHA decided to acquire the SMG business if it grew at its current pace. This is actually a strategic fit for its existing worldwide businesses.

Proposed S$10Mil Convertible Loans To Shares At Conversion Price of S$0.423
Personally, I think the conversion price of S$0.423 negotiated by Dr Beng and team with CHA is too low. But if we were to look at the broader perspective, this is a better option than calling for costly rights issue. The rationalization that I have here are from 2 angles: (1) incentivizing CHA group to take on a bigger involvement in SMG and (2) with the direct funding from CHA group on top of leftover from last year's rights issue for M&A activities, this will free up profits for the formal introduction of a dividend policy in FY2019 to benefit all shareholders. Share prices have languished also due to the lack of patience of many shareholders on getting physical and tangible returns on their investments.    

Parting Thoughts on the whole CHA deal
Risks of the business are in execution of M&A and also assuming no major fall out between Dr Beng and CHA group now that the latter has a bigger controlling stake. Liquidity of the trading of SMG are mostly very poor which means that one can get stuck holding on to too much stakes in SMG. The macro-economic conditions may also worsen and lead to losses- pls see my posting here on "Healthcare Stocks are Resilent in Earnings. Fact or Myth?"

Overall, I think that the CHA offered deals are good for SMG. Most of CHA investments in SMG are actually at S$0.50 per share (S$15Mil in 2017) and  S$0.605 per share (upcoming S$50Mil in 2019). Put it this way, if I paid S$0.605 per share and the SGX traded share price is only S$0.465 per share, I will ensure I whipped the managment hard to continue growing the business as well as introduce other measures to boost shareholders value.

Also, the additional funds on offer by CHA will help to speed up the expansion and branding of SMG into one of the leading medical groups in Pan Asia.

Note: Please see here for previous Part 1 of "Hidden Gem with Explosive Growth- Potential Further Upside of 25% to 50%".

Hidden Gem with Explosive Growth- Potential Further Upside of 25% to 50% (Part 1)

Since my last posting on the enigmatic case of Singapore Medical Group which was grossly undervalued by the market on 8th January 2019, the stock price has soared by an amazing 20% around the announcement period of its Q4 2018 and full-year earnings. This was a big surprise to me as I was expecting the stock to only rally 20% by end of this year due to its lack of visibility among many investors. The small positions that I have initiated thus are giving me immediate unrealized returns that will take 2-3 years to achieve if I have instead invested in pure dividend yielding stocks. The headache now is deciding whether it is time to take profit or to wait for further price appreciation. I will break down my review of Singapore Medical Group ("SMG") into 2 separate postings as I wanted to cover on 2 major events which are potential future stock price catalyst that has suddenly emerged over the past week: 

(i) The explosive growth for SMG for 3 consecutive years and future outlook and the sudden surge in share price by 20% relative to the beginning of this financial year.

(ii) The emergence of a key institutional shareholder offering to buy out part of the shares of the current management to increase its control and the offer of  S$10 million dollars convertible loans to finance additional Merger and Acquisition opportunities. The market seems to have reacted slightly negatively on this news hence the sharp price rally decline from 20% to only 15% as at 23 Feb 2019 relative to the beginning of this financial year.

Explosive Growth for Singapore Medical Group For Past 3 Years

On 19 Feb 2019, SMG finally announced the long-awaited report card for its performance in Q4 2018 and full year 2018. It was an excellent set of strong results with growth of 25.1% for revenue and a 52.1% increase in net profits. Basically, SMG demonstrated that it has once again achieved double-digit growth in topline and bottom line and for 3 consecutive years. This was an extremely impressive feat and is the testament to the depth of the current senior management team in executing M&A for growth. 

Future Outlook For SMG

SMG senior management team will continue to do vertical acquisitions in women's health, pediatrics and diagnostic imaging. The directors are currently exploring opportunities to open a new breast care clinic and have identified two new specialist doctors to join them. 

In addition, SMG is currently exploring opening a new imaging centre in the western part of Singapore and they will continue to explore accretive value-driven acquisition opportunities to accelerate growth and profit trajectory.

The overseas growth strategies in Vietnam, Indonesia, and Australia continued to be in place as SMG build and position itself as a pan-Asian healthcare player. SMG will also look for avenues to grow in markets such as Malaysia, Vietnam, and Cambodia.

Valuation and Price Projection of SMG

Based on its current stock price of S$0.465 per share as at 23 February 2019 (Friday) just a few days after the results announcement, I am projecting another highly probable growth of 25% for the top line and bottom line of SMG. Hence 1 year from now, the share price should appreciate in line with the business growth (proven track record of Management team) to at least S$0.58  per share.

Another method of getting the current valuation as at this juncture is to look for similar transactions. There is actually an upcoming offer by a shareholder to increase stakes in SMG via the acquisition of part of the shareholdings of the exisiting management team. This shareholder has valued the current share price at S$0.605 per share.  

Some retail investors have been skeptical over the whole deal and also accuse the management team of having the intention to exit the SMG business through the sales of their stakes. Some were also extremely upset at the offer of a S$10 million dollars of convertible loans by this particular shareholder. They are crying foul over the terms offered and also suggesting other retail investors exit SMG due to diminishing prospect. I will delve more into this in my next posting but as one can see from the totally different views, valuation is a very tricky and judgemental subject. My personal view as of now remains that SMG will have another explosive year ahead with up to 25% to 50% further stock price appreciation.

Note: Please see here for subsequent Part 2 of "Hidden Gem with Explosive Growth- Singapore Medical Group S$10Mil Shareholder's Loan for M&A".

Budget 2019 Announcement- Not much Ang Pow Given

😓😞It had been a sad week for me. I was initially very happy and excited when I read that Mr Heng Swee Keat announced during the budget announcement that there will be 50% personal income tax rebate for taxpayers.  However, my shortlived joy turned into sorrow immediately when I read the next line " Capped at S$200". Ok so, it turns out that the Finance Minister is only giving a tiny Ang Pow of S$200 at most for YA2019. This was so much lower than the S$500 tax rebate cap given during YA2017. 

Even though there was nothing much for me, I am glad that my Mum qualified for the Merdeka Generation Medical Package. She had previously missed the Pioneer Generation package by just a few months. Despite writing in then to appeal, the government agency rejected it. The increasing medical cost for my parents has always been a great financial strain on my family. Credit to the government to be willing to share some of the surpluses with older Singaporeans by creating the Pioneer and Merdeka packages to help Singaporeans instead of squirreling the money away into the reserves. 

Is it Time To Buy Into Singapore Industrial REIT And Earnings Recovery Coming Soon?

Back in 2012 and 2013, I was holding on to a number of industrial REITs such as Sabana, Cache Logistics Trust and Soilbuild. I had then exited industrial REITs as I noticed that there was an upcoming avalanche of industrial space and the rental psf for these space were dropping fast due to oversupply as well as deterioration in macro-economic conditions. For example, Tampines logistics hub of a few million sqft TOP with many big boys such as DHL, Schenker, Kerry Logistics, and Sing Post E-commerce taking up space there. In 2012, a warehousing facility for rent in western Singapore was going for S$1.56 psf for 3-5 years long term lease. In 2017, the rental rates for logistics space for a similar property dropped to S$1.26 psf. I am actually surprised that for early 2019,  the rates on offer by many of the REITs landlord have continued their decline to S$1.10 psf and there are plenty of vacant properties to choose from with regard to location. As a matter of fact, there was recently a REIT landlord that was willing to even offer a competitive S$1.00 psf to seal the deal with their prospective customer for a ramp up modern warehousing facility. Hence contrary to some analyst report which reported that prices have bottomed up and 2019 will see a recovery in industrial REIT rental, I am still rather skeptical on the outlook.

What are industrial properties?

This consists of light industrial production spaces, heavy industrial production spaces, warehousing spaces for logistical usages and also business parks. Generally, the main use are for industrial support purpose. The government agency will have requirements such as at least 60% for production usages and less than 40% for administrative office use. 

AIMS AMP Capital Industrial REIT, Ascendas REIT, Mapletree Industrial Trust, Cache Logistics Trust, Soilbuild REIT are prominent REITs with industrial properties among their assets portfolio.

Regulatory Risk Investing in Industrial  Properties

There is also another problem with industrial properties in particularly light industry business parks. Under the guidelines of the Urban Redevelopment Authority ("URA"), buildings approved for industrial use are meant primarily for activities such as manufacturing and warehousing. The misuse of industrial space is actually very rampant in Singapore. Businesses ranging from law firms, accounting firms, training providers, interior design firms etc have taken up units in industrial premises. This is due to the very low rental of between S$1.00 psf to S$2.00 psf relative in comparison to actual office rental of S$4psf  to S$6psf. 

I am not sure how stringent the government is going to clamp down on such illegal activities as Singapore is known for its rule of the law. But if it is strictly enforced, the overall industry will have more vacancies due to the exodus of such illegal tenants to real offices. This will surely depress the already low rental psf in the current market for industrial properties.  

Overall Singapore Industrial Property Market as per JTC Statistics and Updates

Screenshot 1: Extraction from JTC Report from J-SPACE- Base year is using 2015

Screenshot 2: Extraction from JTC Report from J-SPACE-Base year is using 2015

Screenshot 3: Extraction from JTC Report from J-SPACE-Forecast till 2021 new supply

Screenshot 4: Extraction from JTC Report from J-SPACE on future supply outlook

The quarterly reports by JTC seem aligned with my general observations as aforesaid mentioned. For the past 3 years, the average supply is 1.4 million sqm and demand is 1.1 million sqm. The current oversupply of industrial space is weighing down on price recovery for industrial REITs. Other than business parks, remaining sub-industrial remains in doldrums. The outcome of the US and China trade war is also unclear at this juncture.

Is there any hidden GEM worth investing right now?

I will probably pen down my thoughts on some of the industrial REITs that I think I will start accumulating in the next blog on this topic. Over the past few years, there is various M&A consolidation for industrial REIT. Also for some badly performing REIT since IPO, there had been a change in senior management which should set a better foundation for future growth. 

Parting Note

My personal thoughts are that Singapore Industrial REIT is a riskier class of asset among REITs hence the higher dividend yield demanded by the market. Soilbuild REIT pricing since IPO is a very good example of the risk associated with industrial properties. Investors who bought purely based on the highest percentage of dividend yield or net asset value per unit for investment should factor in additional assessment factors for risk mitigation. 

Politics and Business Review- The Legend of Hao Ran (皓镧传)

It has been a good Lunar New Year holiday break visiting relatives and friends as well as recharging one's human super battery in order to further one's journey and meet the constant challenges thrown at us in our daily lives. I have no time to do any finance blogging recently as I was too busy catching the latest TV drama "The Legend of Hao Ran (皓镧传)". The amazing thing about this drama is that it teaches everyone about how business and politics work in real life and I swear that it is even better than taking up MBA programmes.

Li Hao Ran is actually the mother of Qin Shi Huang, the Qin King who united all of China and well known as the legendary first emperor of China. The Legend of Hao Ran is actually the story of how Li Hao Ran, a lady of a court official in the  Zhao State who rose to became Empress Dowager in the state of Qin during the Warring States era.

My favourite character in this show is actually Lu Bu Wei. Lu Bu Wei was originally a rich and influential merchant who met and befriended King Zhuang Xiang of Qin who was then known as Prince Yi Ren serving as a hostage in Zhao state. Lu Bu Wei plotted and helped Prince Yi Ren return to the State of Qin. Lu Bu Wei later became the chancellor of the state of Qin upon the ascension of Prince Yi Ren to the throne.

One of the interesting episodes depicts Lu Bu Wei during an auction event in the state of Zhao. At this auction was a Luminous Pearl that was well known to be pricey. Lu Bu Wei quickly offered a bid that is ten times more than the last one to win the auction. However, to the surprise of everyone at the auction, Lu Bu Wei only asked for the wooden box holding the Pearl and gave up on the Luminous Pearl. When the Prime Minister of the state of Zhao asked Lu Bu Wei on the reason for his strange request, he replied that there are many luminous pearls out there in the world but the delicately crafted box is made up of a rare red-earthed wood that can only be found on top of a  special mountain. It is a rarity that determines the valuation of any item. The Prime Minister upon hearing this was very impressed with Lu Bu Wei and thus highly recommend him to the King of Zhao who subsequently appointed Lu Bu Wei as a court official.

My favourite scene so far is the battle of Chang Ping between Qin and Zhao which involved armies sizes totaling close to 1 million men taking part in this historic war. Before the onset of this great battle, the state of Qin secretly switched the Commanding officer and sent their best General named Bai Qi to lead the battlefront and sealed all information about this move. They also spread rumors that the Zhao General Lian Po was a coward which the stupid King of Zhao believed and changed the Commanding Officer to a very young general called Zhao Kuo, who was an advocate of leading attacks instead of adopting a defensive strategy. As a result, the state of Zhao lost this war which led to their eventual demise. The loss of 450,000 men slaughtered by General Bai Qi of the state of Qin was too overwhelming devasting to the state of Zhao and marks a critical milestone whereby Zhao lost their superpower status during the period of the Warring State. This set the stage for the state of Qin to be the dominant military power in that era.

Whenever there are people, there will always be politics. Similarly, this is why there will always be office politics in all modern organizations which seems to bear striking similarities to the Warring State period. The main takeaways learned from the show is for one to be aware of the situation around oneself whereby one may be made use of like a chess piece by others in their political plot for promotion and other power play. While one ought not to do harm to others, we must be mindful not to be made use of by other big fish just like in "The Legend of Hao Ran". :) 

Investment Portfolio Updates- 1 Feb 2019 (Portfolio Yoyo With Market Bouncing Up And Down)

Stock Market Bounce Back Strongly

The stock market bounced back strongly during January of 2019. Even I was surprised by the wild swing in stock market valuation in just 1 month. My portfolio including cash rallied from S$405K (based on what I documented for 31 Dec 2018) to S$445K- an increase of almost S$40K (S$32K capital gain from favorable stock market volatility and S$8K capital injection in Jan'19) which brings the overall investment back to profitability. 

(i) Thai Beverage performed extremely well in January 2019 and it helped to offset the previous 2 months huge plunge in value for my First REIT investments. My only regret for this counter is that I did not accumulate more aggressively when Thai Beverage fell below S$0.60 as I was rather worried over the concentration risk given the already significant stake in my investment portfolio.

(ii) First REIT also rallied from a low of S$0.94 to S$1.10 after the more than 20% plunge from the Lippo Karawaci credit risk issue as well as fear of unfavorable master lease renewal coming up in another 2 years time.

(iii) Frasers Commercial Trust also seemed to have rallied upon the news that Google is in talks with the Trust for 400,000sqft of space at Alexander Technopark- Pls read here for reference.

Additional Investments

1. Have accumulated more of Sing Medical Group shares while awaiting its announcement of its Q4 and full year ending FY2018 financial results. Sing Medical Group has been performing exceedingly well for the past few years. But its share price has dropped drastically- pls refer to my previous blog post on the enigmatic case of Sing Medical Group.

A word of caution here, it is a fallacy to think that medical services earnings are resilient. Please refer to my post here on this topic. For me, it is also more of diversifying my investments into medical services businesses on top of my own personal view that the share prices are currently undervalued relative to other medical services players.

2. I have also invested into Mapletree North Asia Commercial Trust and accumulated 5,000 units at an average unit price of S$1.195. Maple NAC Trust has been doing rather well and a good track record of increasing value for shareholders. The current dividend yield is around 6%.

3. Since the more concrete plans to revamp Orchard Road came out, I have deployed additional cash into Starhill Global REIT. The REIT is trading below its NAV and I am expecting future earnings to bottom out soon in view of more positive rental reversion as well as new tenants contracted. The current yield for this Retail and Office REIT is more than 6%. 

The Worst Is Over?

I am a pessimist on this. Within a short span of just 1 month, there is not much improvement in overall macroeconomic conditions. However, share prices have rallied strongly. The risk of Donald Trump slapping an additional tariff on 1st March 2019 on US$200 billion of China goods is still there. China's growth has, in fact, started slowing down based on recent announcement.

Also, the Brexit crisis is still unresolved. There is still a high probability that UK will crash out of the EU without any deal. This may adversely affect not just UK but the entire Europe economy and spread to the rest of the world. For example, Nissan recently announced the pulling back of plans to manufacture the X-Trail SUV in UK due to loss of preferential zero tariff in the EU market. It will now most likely be manufactured from France. This thus does not bode well for the economy of UK in such event.

Hence I expect the yoyo in the stock market to continue.

Taking Profits And Building Up Cash On Hand

While no one can accurately predict the market, I have decided to continue to adopt a more conservative approach until we have more visibility over the global macro-economic conditions. 

As such, I have sold off part of my Singtel, Thai Beverage as well as First REIT to lock in on the January 2019 high valuation and raise cash level to S$10K. Going forward, I will be maintaining cash position level of S$10K to S$20K.

If a downturn does occur, one will be able to hopefully accumulate more businesses at a cheaper valuation with cash on hand and dividends payout to position the portfolio for future growth upon economic recovery.

Budget 2019 Goodies- General Election Singapore Also Coming In This Year?

I am looking forward to Finance Minister Heng Swee Keat's announcement of the 2019 Singapore Budget on 18th Feb 2019 after the Lunar New Year. It was also recently announced that the registers of electors will be opened for public inspection this month. A lot of people have been speculating that the next General Election may be held in 2019 itself even though it is only due on 15 January 2021. 

Maybe there will be Ang Pows given to all Citizens during the budget announcement this year?