5 Things You Should Know About Singapore O&G Ltd’s Upcoming IPO

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) has been a smashing success in Singapore’s stock market.

Since the start of 2005, the owner of Raffles Hospital has seen its shares soar by a remarkable 920%; to underscore how remarkable that achievement is, the Straits Times Index (SGX: ^STI), Singapore’s market benchmark, has gained only 65% over the same time period.

Raffles Medical’s long-term market-beating performance might be a big draw for investors who are hoping to catch the next big thing in the healthcare space when it comes to the soon-to-be-listed Singapore O&G Ltd.

The company, like Raffles Medical, is also in the business of providing healthcare services, though it’s hard to say if it can ever replicate anything close to the kind of success Raffles Medical has enjoyed. But in any case, here are five things you should know about Singapore O&G’s upcoming initial public offering (IPO).

The nitty-gritty

Singapore O&G is looking to issue up to 43.6 million new shares of itself at a price of S$0.25 each. The IPO would see the healthcare outfit’s total share count increase to 218 million and thus give the firm a market capitalisation of S$54.5 million at its listing price.

Of that block of 43.6 million shares, 2.2 million has been earmarked for subscription by the general public while the rest will be placed to select investors.

The public offer had commenced on 26 May 2015 and will be closed at 12 noon on 2 June 2015. Shares of Singapore O&G are expected to start trading on the Catalist board at 9am in the morning of 4 June 2015.

Key business highlights

Singapore O&G, which currently operates solely in Singapore, is “in the business of providing healthcare services to women, with a particular focus on the female reproductive system, pregnancy care and delivery, and gynaecological and breast cancer.”

With that, it’s no wonder that the company has named itself as Singapore O&G, with O&G being an acronym for “obstetrics [a branch of medicine that involves pregnancy care and delivery] and gynaecology.”

Since its establishment in 2011, Singapore O&G’s specialist-headcount and number of clinics have grown at a fast clip as you can observe in the table below:

Singapore O&G's clinic count

Source: Singapore O&G IPO prospectus

As of 31 December 2014, the firm has seven medical specialists and operates eight clinics seated in five different locations. These clinics are located in Parkway East Medical Centre (two clinics), Gleneagles Medical Centre (three), Thomson Medical Centre, Mount Elizabeth Novena Specialist Centre, and Cassia Crescent (one clinic each for the latter three locations).

There are a number of tailwinds which might power the firm’s future growth, according to the prospectus:

  • Private sector hospitals are steadily winning market share when it comes to live births in Singapore. In 2011, 59.71% of births had taken place in private sector hospitals; in 2013, the selfsame figure had inched up to 60.22%. It’s also encouraging to note that Singapore O&G’s market share in the Private Live Birth Sector had grown from 4.3% in 2012 to 5.6% in 2014.
  • The Singapore government’s push to boost the fertility rate amongst Singaporeans may “bolster demand” for obstetrics and gynaecology services; in my opinion, this might be a stretch given the sustained decline in Singapore’s fertility rate since the 1970s.
  • There’s a growing and aging total population in Singapore and that will naturally lead to higher demand for healthcare services; to that point, the population in Singapore – comprising of residents and non-residents – had grown from 5.184 million in 2011 to 5.399 million in 2013.
  • Higher cancer notifications in Singapore – the figure had grown from 11,680 in 2011 to 12,644 in 2013 – can also potentially lead to more business for the company.

Singapore O&G’s financials

The IPO prospectus has financials for the firm going back to 2012.

Chart 1, Singapore O&G's historical revenue, profit, and operating cash flow

Source: Singapore O&G IPO prospectus

I trust it’s easy to observe from Chart 1 that Singapore O&G has managed to enjoy consistent growth in revenue, profit, and operating cash flow for the three year period we’re looking at. In addition, the firm’s balance sheet has also been rock-solid; as Chart 2 shows, the healthcare outfit has seen its cash balance grow while carrying minimal or zero borrowings.

Chart 2, Singapore O&G's balance sheet

Source: Singapore O&G IPO prospectus

From the three years’ worth of financials we’ve seen from Singapore O&G, the firm has ticked most of the right boxes given its debt-free balance sheet and growing revenue, profit, and operating cash flow. But, it’s worth pointing out that three years is still a short time when it comes to the assessment of a firm’s track record. And while caution must always be taken when trying to extrapolate the past into the future, a short track record would warrant even more caution.

Use of proceeds

Proceeds of S$9.2 million are expected from the IPO after deduction of the relevant expenses. Here’s how the proceeds will be utilized:

  • S$3 million for business expansion: More specifically, Singapore O&G’s looking to acquire as well as open more medical clinics. As mentioned earlier, the firm’s only operating in Singapore at the moment, but it does have ambitions to establish a “regional presence” in the future. In particular, the healthcare provider’s looking closely at Myanmar, Indo-China, and Malaysia.
  • S$6 million to be spent on investments in healthcare professionals and synergistic businesses: Singapore O&G would like to expand its healthcare offerings to include infertility and IVF services; child care services; paediatrics (including neonatolgy); and gynaecological cancer specialties.
  • The remaining S$200,000 will be used for general working capital.

Dividend policy and valuation

While Singapore O&G does not have a fixed dividend policy at the moment, income investors might be happy to note that the firm’s intention is to pay out 90% of its after-tax profit for the whole of 2015.

The company’s generosity with its dividends might be an area of concern for investors though. There can be many reasons why a private company would like to list its shares, but from the perspective of stock market investors looking to invest in the firm, one of the most constructive reasons for a listing would be to raise capital to help grow the business.

In Singapore O&G’s case, the fact that it has chosen to not retain most of its earnings to fund future growth and yet has earmarked the bulk of its IPO-proceeds for just that purpose (to fund future growth, that is) does raise some questions about management’s capital allocation chops and the rationale for the IPO.

To be clear, I’m not saying that there’s anything unsavoury going on – I’m merely pointing out some important issues that investors may want to note.

Singapore O&G will be listed at a low valuation. At its listing price of S$0.25, the firm will have a historical price-to-earnings (PE) ratio of 12.3 thanks to its earnings per share of 1.95 cents which is based on the profit of S$4.25 million in 2014 and the expanded post-IPO share count of 218 million.

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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 writer Chong Ser Jing owns shares in Raffles Medical Group.