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What Investors Need to Know About ISEC Healthcare’s IPO

Credit: Simon Cunningham

International Speciality Eye Centre or ISEC Healthcare Ltd. launched its initial public offering (IPO) on 14 October 2014. The medical eye treatment specialist is looking to raise about S$19.6 million in proceeds from its proposed listing on the Catalist board of the Singapore Exchange.

Other companies that went public this year include Versalink Holdings Limited(SGX:40N), Japfa Ltd(SGX:UD2), Terratech Group Ltd(SGX: 40I), Spackman Entertainment Group Ltd(SGX: 40E)and Starburst Holdings Ltd (SGX: 40D).

 More about ISEC Healthcare

ISEC Healthcare provides medical eye care treatments such as laser eye surgery (LASIK), and speciality eye surgeries. It has centres in Malaysia and Singapore. The centre in Singapore is located at Mount Elizabeth Novena Specialist Centre Singapore.

On 26 August 2014, its subsidiary ISEC Eye signed a five year service agreement with Parkway Hospitals Singapore (PHS) to provide specialist medical ophthalmology services at the Lee Hung Ming Eye Centre (a clinic under Parkway Eye Centre). The Lee Hung Ming Eye centre was established in 2007 at the Gleneagles Hospital.

In the IPO prospectus, ISEC Healthcare listed several competitive strengths. The company has a team of highly qualified and experienced specialist doctors which can provide a high quality and comprehensive range of eye care services. It believes that it has an asset light, and strong cash flow business model.

According to the IPO prospectus, the company also sees itself as “well positioned to capture the growing demand for private eye care services”. From the company’s standpoint, the reasons for this growing but unmet demand are:

a)     An ageing population

b)     Rising income levels

c)      Increasing private insurance coverage

d)     A growing medical tourism sector in South-East Asia

Details of the IPO

A total of 70 million shares will be offered at S$0.28 per share. The IPO will close on 23 October 2014 at 12 noon, with the shares will debut on the Catalist board on 28 October 2014 at 9am.

Of the $19.6 million raised, it plans to use $13.8 million for business expansion in Asia Pacific (including Malaysia and Singapore). It also has earmarked $2.5 million for general working capital purposes, and the remaining $3.3 million for listing expenses.

The market capitalisation, based on the post-IPO share capital of 458.5 million shares, will be S$128.4 million.

A look at the Financial Statements

Below is a summary of the unaudited pro-forma statement.

FY2011 FY2012 FY2013
Revenue (in S$’000) $18,622 $20,614 $22,342
Gross Profit (in S$’000) $9,567 $10,686 $11,510
Gross Profit Margin 51.4% 51.8% 51.5%
Profit for the Financial Year (in S$’000) $4,660 $5,689 $5,661
Earnings Per Share (in S$ cents) $1.03 $1.26 $1.32

  Source: IPO Prospectus; Author’s calculations

The financial year for ISEC Healthcare lines up with the calendar year. The revenue has shown growth from 2011 to 2013. From a geographical standpoint, 78.2% of its revenue came from Malaysia, while 21.8% came from Singapore for 2013. The gross profit margin has remained a healthy 51% plus for the past three years. From a geographical standpoint, 59.2% of its gross profit came from Malaysia while 40.8% came from Singapore for 2013.

Let’s look at the cash flow statement as well.

FY2011 FY2012 FY2013
Net Cash from Operating activities (in S$’000) $6,482 $6,594 $8,312
Capital Expenditure (in S$’000) $1,074 $1,095 $1,922
Free Cash Flow (in S$’000) $5,408 $5,499 $6,390

Source: IPO Prospectus; Author’s calculations

The capital expenditure in the table above mainly covers electrical equipment, medical equipment and renovations. The company appears to have ample free cash flow for the last three years. Free cash flow can be used to reinvest into its own business, reduce debt, buy back shares, or pay dividends to shareholders. Speaking of dividends, ISEC Healthcare intends to distribute an annual dividend of no less than 25% of it net profits (attributable to shareholders).

As of end of March 2014, ISEC Healthcare had cash and cash equivalents of S$11.5 million, and bank borrowings of $708,191.

Risks

One of the risk listed in the IPO prospectus is the service agreement between ISEC Eye and PHS. The risk comes in the high concentration of profits coming from ISEC Eye. This subsidiary made up 40.8% of the company’s combined gross profit for FY2013. This agreement expires on 31 August 2019.

ISEC Healthcare’s revenue also depends on the financial ability and willingness of the individual patient to opt for private healthcare services. This might mean that its revenue is not recession-proof, as individual patients could opt for subsidised public healthcare services, or other lower cost private healthcare competitors.

Valuation

ISEC Healthcare will be going public at a historical price-to-earnings ratio of around 18.

  Major Shareholders

Perhaps, one of the interesting notes from the IPO prospectus is the statement below:

Our business model aligns the interests of our specialist doctors with our Group and with our Shareholders and we have been able to retain and grow our pool of specialist doctors.

It should be noted that of the top 24 post-placement shareholders, 17 of them are employees of the company. The top two shareholders would be Dr. Lee Hung Ming (34.4%) and Dr. Wong Jun Shyan (9.2%). Dr. Lee Hung Ming is the Executive Vice Chairman of ISEC Healthcare while Dr. Wong Jun Shyan is the Chief Executive Officer of ISEC Healthcare.

Foolish summary

In all, the company operations is currently still small in scale, but it appears to have strong financials. Its future growth may depend on its ability to hire more eye specialists in order to expand within Asia Pacific.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.