November 7

Should You Buy HC Surgical Specialist IPO (SGX: 1B1)?

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One new company that have debuted in Singapore’s stock market is HC Surgical Specialists Limitedhc-surgical-specialist-ipo (SGX: 1B1).

Despite doing a private placement at S$0.27, it opened at S$0.55 on 3rd November 2016 morning 9am, double of what the investors would have paid for.

So the question weighing on many retail investors is: Should I Buy HC Surgical Specialists after it has soared so high from the IPO price?

We take a deeper look at the company below and highlight four things investors may want to know about the company’s initial public offering (IPO).

  1. Business Introduction

According to HC Surgical’s IPO prospectus, it is “a medical services group primarily engaged in the provision of endoscopic procedures, including gastroscopies and colonoscopies, and general surgery services with a focus on colorectal procedures across a network of clinics located throughout Singapore”.

In short, HC Surgical provides surgical procedures for our digestive systems, solving problems like constipation, diarrhoea and irritable bowel symptoms. Actually, you can even know the company’s principal activities by looking at its logo – a picture of the whole digestive system. (IMO, they can showcase a more professional logo simply through outsourcing to an online freelancer.. haha)

  1. Financials

The IPO prospectus for HC Surgical has its financials for 2014, 2015, and 2016. Here are how some of its business figures have grown:


hc-surgical-pnl
Source: HC Surgical IPO prospectus

 hc-surgical-redeemable-convertible-loansSource: HC Surgical IPO prospectus

As you can see from the table above, the company’s revenue have increased over the past years from FY2014 to FY2016. However, profits have been sluggish due to higher employee expenses and other expenses. Notably, there is a maiden finance costs incurred during FY2016 of S$444,000 which arises from the Redeemable convertible loans.

That said, the company has a rock-solid balance sheet with S$5.8 million in cash and cash equivalents. And being a healthcare company, its net profit margins are above mouth-watering 40+%!

In fact, these stats I just mentioned follow the previous Singapore O&G (SGX: 41X) closely, except that Singapore O&G seems to be in a better shape with higher profit growth and rapid increase of the cash hoard which it can utilize to buy other clinics and expand quickly. For a quick comparison, see the 2 graphs below:

singapore-og-pnl
Sourced from Singapore O&G prospectus

singapore-og-bal-sheet
Sourced from Singapore O&G prospectus

  1. Future growth plans

According to the prospectus, HC Surgical is looking to grow its business mainly through the following (Click for clearer picture):

hc-surgical-growth-plans

I have also pulled out Singapore O&G IPO growth plans from back then…

singapore-og-future-plansSourced from Singapore O&G prospectus

From what I see, acquisitions and joint ventures are the way to go for small medical groups like Singapore O&G, Singapore medical group and HC Surgical. This is because as compared to Raffles medical, they would require much more capital and a larger patient base to continue driving growth.

As such, its important to look at their cash flow to see if it can keep up with their growth plans.

hc-surgical-cash-flow

We have several things to take note from the table above. The huge jump in its war chest in FY2016 (S$5.8 mil) is due to 2 reasons

  1. Firstly, dividends paid in FY2016 were cut by a huge amount (from S$3 mil+ to only S$72K) – probably the owners know that they are going for a public listing and has reduced it significantly to present a better picture.
  2. Secondly, S$2 million had come from the issuance of the convertible loans, which may be dilutive in future.

With the net proceeds of the IPO listing coming up to appx S$6.15 mil, it brings the total cash balance to around S$12 mil. Post IPO, the market cap of the company stands at S$39.5 mil (est. S$80 mil if you take the share price of S$0.55).

Thus, I believed that this S$12 mil amount is quite a reasonable amount if you talk about utilizing it to acquire other private companies and it can bring about steady growth going forward.

  1. Dividend policy and valuation

At HC Surgical’s listing price of S$0.27 per share, the firm’s valued at 13.5 times its earnings of 2 Singapore cents in 2016 after taking into account the new shares to be issued for the IPO.

If we take in the closing price of S$0.58 on Friday evening, the P/E ratio would be 29. For some context, Singapore O&G has a P/E ratio of 33.5, Raffles Medical Group has a P/E of 36.6 and ISEC Healthcare is trading at 35.7 P/E. So while HC Surgical share price has some more room to grow, it is missing a strong track record to command that high P/E ratio as compared to the other competitors.

Last but not least, HC Surgical has stated in its IPO prospectus that it intends to distribute at least 70% of its net profit in years 2017, 2018 and 2019 as dividends. That translates into a decent 2.4% yield based on its latest EPS of 2 Singapore cents and share price of S$0.58.

Final Words

To round up, HC Surgical’s flattish profits throughout the years indicates that it may have problems channelling any higher revenue into higher profits. Furthermore, HC Surgical’s share price has already moved up from S$0.27 to S$0.58 and now hovers near a P/E ratio close to its peers. Thus, the stock may probably face a significant resistance if no or little growth is achieved.

That said, HC Surgical is operating in the medical/healthcare industry, which is the raving hot industry investors are zooming in at present. Personally, I would adopt a wait-and-see approach at this point in time to see if 1) the share price can correct to a more comfortable level of 20-25x earnings and 2) any catalysts like acquisitions to accelerate growth and support its high valuations.


Tags

HC Surgical IPO, HC Surgical Specialist IPO


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