In order to unlock the undervalued business of SingMedical Group
(“SMG”) which I mentioned briefly in my post on 9 June 2019, I have suggested the
possible option of privatization using the example of Thomson Medical Centre which
had previously been acquired by the local business tycoon Peter Lim before
doing a “future relisting” on the SGX 6 years later. Thomson Medical is close
to my heart as I used to be involved in part of its accounting and financial
work many years back. Also interestingly, another medical group, Health
Management International recently announced a privatisation initiative after
years of languishing share price performance amidst good financial results.
1. Acquisition of
Thomson Medical Centre by local business tycoon Peter Lim and eventual
privatization and “relisting” it on SGX.
To recap, Thomson Medical Centre (“TMC”) was founded by Dr Lim Cheng
Wei Chen in 1979. It was listed on SGX in 2005 and was the fourth healthcare
services provided on SGX after (i)Parkway Holdings, (ii) Raffles Medical Group
and (iii) Health Management International. In 2010, Peter Lim made an offer to
buyout TMC based on a valuation of approximately S$513 Mil which was a whopping
60% premium over the last traded price. TMC was subsequently delisted
from SGX in January 2011.
Of course, there were some critics then who thought that Peter Lim
might have overpaid for TMC by paying such a colossal premium over the
business. It turns out that the astute businessman Peter Lim had the last laugh
as he sold the TMC business (along with TMC Life Science) in 2017 to Rowley
shareholders for S$1.9 billion
which is multiple times (3.8 times) the amount he paid initially. Peter Lim’s
bet on the aging population and booming healthcare services via the building up of
healthcare portfolio was simply right on the spot and brilliant. Also, by
injecting the assets into his public investment vehicle Rowley, Peter Lim looks
set to participate further in its future growth. Rowley later changed its name
to Thomson Medical Group.
2. Health Management
International partnership with private equity firm EQT and proposed
privatization offer of S$0.73 per share
On 5th July’19, Health Management International (“HMI”)
had also announced a proposed privatization by offering S$0.73 per share via a
partnership with private equity firm EQT. This represented a premium of 24.8%
over the volume-weighted average price of HMI over the last 1 mth. Existing
shareholders of HMI can choose to sell their shares directly or swap them for
new shares in the offeror.
One of the main reasons cited by HMI management for privatization is
due to the challenges in raising capital is because it is highly dependant on
the market conditions. This draws a similar parallel dilemma to what SMG is
facing too, that is, rights issue at an ever declining prices due to the
undervalued business by the market.
After privatization, HMI will build up the current business with new
funds of up to S$150Mil from EQT for investments and acquisitions. The target is
to work towards another IPO within 18 months after the initial 4 years of
repackaging at a higher valuation. This is clearly another business plan that
resembles the billionaire Peter Lim’s strategic investment into TMC in 2010 and
the partial exit in 2017.
3. Is there the possibility that SingMedical Group will also be privatized and shareholders
offered a premium to last traded price?
This is only a remote possibility at this juncture as CHA Medical
Group had just provided an equity convertible loan of S$10Mil to SMG to fund
new acquisitions.
However, if share prices still languish as it had been over the past
2 years despite the turnaround of its business and better financial performance by Dr
Beng, future capital raising exercises will be detrimental to the shareholders
of SMG as only a very low amount can be raised which forms a vicious downward
cycle on the share price. The substantial shareholders will not be happy with such
perpetual share price spiraling downwards after every rights issue.
SMG can choose to either work with the Korean CHA Medical Group or
partnered with a private equity firm (just like HMI) to buy out the current
shareholders and then do an IPO or business injection into a shell company
already on SGX to realise its intrinsic value.
4. Will retail shareholders of SingMedical
Group benefit from such privatization attempt?
The answer is actually a resounding “NO” based on its past few years
of excellent financial performance and also rapid business expansion. The
offeror can make a low ball offer of just a token 25% more (say S$0.50 per
share) than the last traded price of S$0.395 per share. However, many retail shareholders
may have no choice but to take up the low offer as once the firm delisted, they may be stuck with the shares on hand with no buyers since it is no longer
trading on the stock exchange.
The last valuation of SMG business was just recently concluded by
CHA Medical Group valued the business at a price of S$0.605 per share. Hence
“privatization offer” may not necessarily be a good thing for retail shareholders
but it does enable investors to cash out at some premium if the undervaluation
in market price situation has been prevailing for many years.
5. Summary
Summarising, I hope that Dr Beng and his management team will
consider the implementation of a Group dividend policy as a mean to try to
narrow the current significant gap between market pricing and the intrinsic
value (current earning multiple benchmarking to the other medical players on SGX is way too low). If
this still does not work, a strategic review of options such as privatization
should be considered to unlock the intrinsic value of the SMG business.
Please also see my previous postings on SingMedical Group:
After privatization, HMI will build up the current business with new funds of up to S$150Mil from EQT for investments and acquisitions. The target is to work towards another IPO within 18 months after the initial 4 years of repackaging at a higher valuation. This is clearly another business plan that resembles the billionaire Peter Lim’s strategic investment into TMC in 2010 and the partial exit in 2017.
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