Singapore O&G: 6 things to note in the 2019 annual report

Am I the only SOG shareholder who has given up looking at the share price?  Anyway, here’s are six key highlights from their 2019 annual report.

Let’s start with the bad news:

Dermatology impairment

Increasing competition and weak medical tourism trends in Singapore resulted in a SGD11.3 million goodwill impairment for the year. Excluding the goodwill impairment, the company’s net profit would have been SGD10.8 million, the same as 2018 levels. SOG intends to improve dermatology earnings by increasing  marketing activities and cross-selling their services with other SOG clinics. Both SOG dermatology clinics are considered essential services and will remain open during the 2 month lock-down. I’ll be happy if dermatology EBIT levels can remain flat at 2019 levels (SGD0.9 million, down 61% from 2018).

Lower 2019 net profit from Dr Heng

SOG has a profit sharing scheme for key doctors like Dr Heng where she is paid a bonus if her annual net profit contribution exceeds SGD1.84 million. Dr Heng’s bonus fell 59% lower on a year on year basis to SGD80,804 which was the lowest level since the company’s IPO. I’m not sure why her contributions are lower but it could be because she was involved in the search for a new CEO this year. Based on my calculation, Dr Heng’s net profit contribution was SGD1.5 million or around 14% of the company’s recurring net profit in 2019 compared to 23% in 2016. That’s a sign that the company is becoming less dependent on their star doctors like Dr Heng.  It’s also encouraging that Dr Heng chose to renew her employment contract in end-2019.

That was all the bad news I could find. Here’s the good news!

Increased market share for private births

SOG’s share of the private birth market increased again with the company’s doctors delivering 1,985 babies in 2019 or 9.5% of the private birth market.

O&G doctor headcount increased by one with Dr Clara Ong joining the company in May 2019. As a result, babies per O&G doctor fell 6% year on year because Dr Clara arrived only in the middle of the year.

Babies delivered per O&G doctor

2015: 272

2016: 288

2017: 286

2018: 304

2019: 284

I wouldn’t be too worried about the 2019 blip – babies per O&G doctor have generally been increasing since the company’s IPO.

Strong contributions from cancer segment

Cancer surgeries per doctor is now at its highest level since the company’s IPO which is encouraging. 

Dr Radhika, a cancer surgeon was the only SOG doctor who chose not to renew her employment agreement in end-2019 so SOG is looking to recruit more cancer surgeons.

Fortress balance sheet

SOG has a rock solid balance sheet with no debt and SGD25.9 million in cash. Their share price has fallen so much that cash now makes up 25% of their market cap so that’s one of the reasons why I’m still holding on to my shares.

Permanent chairman

Dr Lee and Dr Heng, the two founders of SOG and Dr Beh, the current chairman of the SOG board has each served two year terms as the chairman. Dr Beh will continue to be the chairman of the company. Dr Beh is the youngest (57 years old) among the three doctors so this move makes sense.

Summary

In short, SOG seems to be taking the right steps for long term growth. COVID-19 may hurt results this year but they are in a strong position to ride out the downturn with their strong balance sheet with no debt.  Dermatology looks bad but with a huge goodwill impairment in 2019, SOG can finally stop doing dermatology impairments every year. O&G, cancer and paediatrics are growing nicely and the company is becoming less dependent on their founding doctors. I’m not adding more shares despite the low valuation because SOG is already one of my larger positions. I’ll be grateful if you let me know if I missed out anything.