Talkmed Group Ltd - Foreign patients deterred by stronger S$

■ Slight growth in 9M15 revenue on the back of weakening patient numbers (esp. foreign patients due to stronger S$).

■ Higher operating costs due to increase in staff and operating lease expenses.

■ Loss-making trend for associate HKIOC expected to continue till FY16. Faster turnaround of the business will be a potential re-rating catalyst.

■ A long-term healthcare play with a niche in oncology business and potential for overseas expansion.

Currently trading at 17x FY17F P/E, with dividend yield of 3.9-4.6%. Maintain Add.

9M15 revenue grew 4.2% yoy; softer 4Q expected
Talkmed reported 3Q15 revenue of S$15.7m, up 0.6% yoy but down 2.4% qoq. Given that more than 50% revenue contributed by foreign patients (mainly from Indonesia, Malaysia and Vietnam), its business was hurt by the appreciation of the Singapore dollar against regional currencies. Should the currency trend persist, over the near term, we expect minimal growth in patient visits.

More doctors and operating leases, higher costs
3Q15 operating costs went up 53.4% yoy and 34.2% qoq as a result of higher employee benefits and operating lease expenses. Recruitment of four new staff in 2015 and the timing of staff bonuses drove employee costs up. It also signed two new operating leases in Mar and Jun 15.

Associate still loss-making, may break even in FY17
Recall that Talkmed acquired a 30% stake in associate Hong Kong Integrated Oncology Centre Holdings Limited (HKIOC) back in Jun 15. This investment is currently lossmaking as though its patient numbers are increasing, that has yet to offset its high fixed costs (rental etc.). Management expects the loss to widen in 4Q15 as the newly-opened HKIOC intensifies publicity efforts, before possibly breaking even in FY17 (target).

Key risk: high reliance on founder and CEO
Talkmed remains highly reliant on its CEO and founder Dr Ang, the key contributor accounting for more than 60% of its revenue. However, we continue to like the oncology specialist business as a long-term healthcare play, and forecast FY15-17 dividend yield of 3.9-4.6%. A potential re-rating catalyst will be faster-than-expected turnaround of its investment in HKIOC.

Technical Analysis
Daily Chart
Maintain Add with DCF-based target price of S$1.30 (WACC: 8.4%) 
We adjust our forecasts to account for lower patient visits, and higher operating expenses and associate losses, resulting in our FY15-17 EPS estimates falling by 4.0%/ 6.5%/9.1% respectively. As we roll forward our valuation to CY16, our target price rises to S$1.30 (WACC:8.4%). Maintain Add. (Read Report)

Source : CIMB Research

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