The Motley Fool

Is Singapore O&G Ltd a Great Business to Own?

Singapore O&G Ltd (SGX: 1D8), or SOG, is a leading group of specialist doctors and medical practitioners who have a long and established track record in the Obstetrics and Gynaecology (O&G) field. The group treats illnesses and conditions relating to women and children’s health and has four operating segments, namely O&G, cancer-related, dermatology and paediatrics. SOG employs a total of 15 specialist doctors consisting of six in O&G, three in cancer, two in dermatology and four in paediatrics.

SOG has seen its share price decline from around S$0.50 to the current S$0.36 over the last two years (adjusted for the share split of 1-for-2 which occurred in May 2017). However, this was still significantly higher than its split-adjusted IPO price of S$0.125 back in mid-2015. Investors should ask themselves if the financial and operating characteristics of the business make it attractive to own its shares. This can be determined by looking at the track record of the group’s revenue, profits, margins and dividends.

I took a look at the five-year trends for the above, and here’s what I found out.

Revenue and margins

Singapore O&G has managed to grow its top line by almost three times in the last five years, from S$13.5 million to S$34.7 million. Operating profit also almost tripled, while net profit more than doubled from FY 2014 through to FY 2018. The increase in revenue was mainly driven by the introduction of the dermatology division in FY 2016, which contributed S$8.5 million in revenue that year. In FY 2017, SOG started a paediatrics division, though the top line contribution for both FY 2017 and FY 2018 was minimal (S$200,000 and S$958,000 respectively).

Another positive trend is the rise in operating profit margin over the years, from 37.2% in 2014 to a high of 39.4% in 2018. Net profit margin, however, was more erratic, but note that FY 2018 saw an impairment of goodwill amounting to S$2.8 million for SOG’s dermatology division. Stripping this out, the net margin would have been 34.4%, a new five-year high.

Free cash flows

SOG has an excellent track record of generating consistent free cash flows (FCF) every year, though FY 2017 saw a sharp decline in operating cash flow. The business is cash-generative and should continue to be so, barring unforeseen circumstances.

Dividend history

SOG has a good history of paying out dividends, and in the most recent FY 2018, the group paid out a total of 1.7 Singapore cents per share of dividends, a five-year high. At SOG’s last traded price of S$0.36, its trailing dividend yield was 4.7%.

A great business, but risks remain

From the above, it can be seen that SOG is indeed a great business to own, as it has very high operating and net margins, generates consistent FCF and also pays an increasing dividend. However, some risks to the business do remain, and one of them is the poorer performance of the dermatology division as a result of stiffer competition. This may lead to further impairments in future as the carrying amount of goodwill (as at end-2018) was S$24.1 million.

Another key risk is that of the falling birth rate in Singapore. Less number of babies born will impact SOG’s ability to grow its key O&G division, and the group may have to rely on its other divisions to offset the slowdown.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore O&G Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.