SOG 2Q19 results: Patience needed… and a 9 page SOG report!

I have uploaded a 9 page SOG report here on InvestingNote and will be grateful if you can vote for me after you download the report.

No one has voted for me yet so I’m hoping everyone can help… I’m planning to donate 100% of any cash prizes to charity and there’s a lucky draw prize (DJI drone) for voters! You will have to set up an InvestingNote account to vote.

Anyway, here are the top 3 reasons to buy SOG which was described in greater detail within the report.

  1.  SOG offers resilient healthcare growth in these uncertain times – 27% earnings growth from 2015-18 by focusing on obstetrics, paediatric and cancer treatments which are less vulnerable to recessions and medical tourism trends. Earnings per share CAGR should be at least 10% over 2018-23 even with constant doctor headcount.
  2. There is huge upside from 11 younger SOG doctors as their 2018 earnings are well below their older peers. These 11 doctors are rapidly improving their surgery/patient loads because of referrals from the O&G segment.
  3. SOG is trading at 17x recurring earnings which is close to its lowest level in 4 years. The market is worried about start-up losses from new clinics and temporary dermatology issues but earnings should improve from 2020 onwards.

On a separate note, SOG’s share price has been falling because of 2Q19 results which looked terrible on the surface.

The good:

  • Revenue grew 14% year on year with all segments growing except for dermatology.
  • All four segments reported quarter on quarter growth in operating profit.
  • Dermatology seems to be stabilizing – revenue was up  5.9% quarter on quarter and operating profit was up sequentially as well.
  • Recurring net profit grew 31% quarter on quarter but fell 4% year on year.
  • The paediatric segment turned profitable (SGD0.2 million EBIT in 2Q19) two years after the company hired its first paediatrician.  The future looks bright for this segment with SOG delivering more than 1,800 babies in 2018 alone. Four  paediatricians are now working in the segment and it is now the second largest segment in SOG by doctor headcount.

The bad:

  • Dermatology revenue fell 5% year on year. But dermatology should return to growth in 2020 with SOG recently hiring a dermatologist specializing in children skincare issues.
  • Reported net profit fell 24% year on year because SOG benefited from a SGD1.1 million gain from a dispute with its previous independent director.
  • The interim dividend is down by 22% probably because of the lack of one-off gains but I’m happy for SOG to reinvest earnings because of its high 20.8% ROE.

All in all, I think the good outweighs the bad and I think we should be patient with the company as they execute on their vision for equal revenue from all 4 segments.  I explained how SOG is worth at least 70-80% more based on the SGD0.37 share price in my report so do give it a read!

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