Singapore O&G Ltd

Singapore O&G Ltd ("O&G" or the "Company") is offering 43.6m new shares at $0.25 each for an initial public offering on Catalist. There will be 41.4m for placement and 2.2m shares for the retail public. The IPO will close on 2 June 2015 at 12pm.The market cap based on 218m shares will be around $54.5m

Principal Activities

The Company comprises a group of specialist medical practitioners in women's healthcare and has an established track record in the Obstetrics and Gynaecology ("O&G") field. O&G particular focus is on pregnancy care and delivery, the female reproductive system, and gynaecological and breast cancer.

The Company has 8 clinics across 5 locations in Singapore

Simple Structure

The Company has a very simple structure. It is actually quite easy to understand. If i can "hazard a guess" each of them used to be operating independently. After all, each clinic is a revenue centre like itself.The 8 clinics then "swop 100% ownership of their respective companies" into the shares of the holding Company and proceed to list the holding Company O&G. O&G will be in a good position to acquire new clinics in Singapore and across the region. My guess is that it will move to an acquisition mode once its shares are trading at attractive valuation, the shares will then becomes a powerful "currency" for acquisition but the key is execution. They must be able to be "one-mind" and execute its plans well. 

If i can imagine a similar group listed on SGX, it will be like Q&M Dental. I have to say that Q&M Dental have executed very well and the share price have reflected as such but that is because they also have a tight agreement among the initial shareholders not to sell out their shares for many years. And this allows the founders to execute of the business strategy.

Financial Performance

The Company has been showing pretty stable revenue and profits and that increased quite nicely in FY14. The revenue was $13.5m and net profit came in at $5.8m. The net margin was a healthy 37.2%.

The Company intends to distribute up to 90% of its net profit as dividends for FY2015. That translate into 7.3% based on historical FY2014 earnings and could potentially be higher if the EPS continues to improve in FY2015. Based on the EPS of 1.95 cents, the company is listing at a valuation of 12.8x PE.

Use of Proceeds and Future Plans

1. Expand our business operations locally and regionally through organic growth, joint ventures and acquisitions
2. Investments in healthcare professionals and synergistic businesses to ensure that we are at the forefront of the industry 
3. Diversify and grow our patient base to include more corporate clients and medical travellers

What i like about the Company

• It is in the niche healthcare segment for women. I think healthcare is a good sector that still have an exciting macro story. 
• While Singapore can be a mature market,  it will provide a strong base in which allows O&G to expand into the less penetrated regions
• It has stable cash flow and medical practices is a very cash generative business
• It's a debt free business. There is much headway to use leverage to finance future growth 

My Concerns

• Humans are pretty mobile creatures so if they are unable to retain their talented specialists, the Company will be in trouble. Nothing is going to stop the specialists from cashing out and then restarting the business again sometime down the road
• Why are they having such a high dividend payout? Shouldn't they be keeping more cash at the hold co for expansion? A lower payout of ~50% will be sufficiently attractive so that is is sustainable as well. It will have a nice balance between keeping enough cash to grow the business and rewarding shareholders
• The ability to amalgamate the different clinics under one corporate identity SOG. Currently i would view it as separate clinics rather than O&G clinics. If the intent is to keep them separate, then the company would not be able to build up a brand and image.

Valuation

The listed peers in the healthcare sector group are currently trading at ridiculous valuations. Q&M Dental is trading in excess of 50x PER, Raffles Medical Group at more than 30x and Healthway Medical is a more reasonable valuation of 14x historically. Using the EPS of 1.95 cents and a PE multiple of 14-20x, the fair value of Singapore O&G should be between 28c and 39 cents. I understand the placement is pretty hot and have been taken up by the doctors' rich friends as such i couldn't get any placement.

Chillis

Given this is the first IPO with public tranche after a long hiatus, i have to give it some support lah! I will give it a 3 Chillis for reasons mentioned above. Hooooooot ah....