Singapore healthcare stocks have been pretty unloved for the past few years. I remember it used to be a beloved sector where investors can immediately understand the importance of the service – every sick person needs the service, it is necessary and you (or your insurer) have to pay for it no matter how expensive it is. It sounds like a wonderful business.
The FTSE ST Health Care Index peaked at around 1,500 points in 2016 but it went downhill from then on, dipping close to 800 points during the Covid-19 crash. Now it is back to almost 1,200 points.
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I can sense that the interest is back using some simple technical analysis – prices are rising on higher volume which means that the buyers interest is strong as they are willing to pay higher price to get the shares. At the point of writing, its price support is higher than the previous high which means that it is less likely (but still possible) to go down lower.
There isn’t an ETF that tracks this index and hence I decided to handpick 3 healthcare stocks which I think are currently undervalued.
Singapore Medical Group (SGX:5OT)
Many healthcare services stocks have adopted the roll-up strategy – merging many private clinics to form a large medical group for listing. Singapore Medical Group is no different. You can see their diverse range of clinics below, forming a network of specialists and services – paediatrics, gynaecology, urology, dental and more.
Singapore Medical Group’s share price is S$0.34 at the time of writing and that is half of the highest price of S$0.68. Healthcare stocks just got out of favour and it seems like interest is back. The recent price increase has been accompanied by higher volume.
UOB Kay Hian covered the stock and I agreed that it is currently cheap because of two reasons.
First, it is trading below its average historical PE of 17.4x.
Second, it is trading at a PE below its peers’ – Singapore Medical Group’s PE of 11.7 vs the average PE of its peers of 18.3.
Moreover, there are talks that there could be a possible transaction involving the company’s shares.
Could it be a delisting offer or private placement or a mandatory offer? Such activity is much needed among the healthcare stocks as it could draw attention to this undervalued sector and resuscitate it.
Singapore O&G (SGX:1D8)
I think they should change their stock name. O&G can mean oil and gas and it isn’t the best sector to be associated with now. O&G here stands for obstetrics and gynaecology.
Some investors are quick to say that the birth rate in Singapore is on a decline and that means there’s limited growth for this stock. That’s true but they can capture more market share and/or raise prices. Also, the Group has expanded into other medical services such as dermatology, oncology and paediatrics. Hence, it is broader than O&G. So please change the name!
Singapore O&G share price has tumbled from a high of S$0.64 to S$0.26. That’s more than 50% loss if one bought at the top (excluding dividends).
We can’t use the historical PE for Singapore O&G because it incurred a loss last financial year. It isn’t a concern because it was a non-cash loss due to a huge impairment of goodwill. The goodwill was created after the acquisition of a dermatology clinic. This is normal for acquisitions in the services sector where book value tends to be low and large goodwill are created as a result.
We can look at the free cash flow yield considering that earnings are impacted by non-cash impairments. The historical free cash flow yield was 12%, and it is higher than the preceding years. Hence, the market is underpricing its cash generating ability. Also, the Group has been buying back its own shares for many months. This shows the management also believes the share price is undervalued.
HC Surgical (SGX:1B1)
HC Surgical got in the news for the wrong reasons – one of their doctors, Julian Ong, was sued lost a defamation suit against a woman who told other doctors that he, along with a psychiatrist (not part of HC Surgical) took advantage of female patients for sexual activities. He subsequently won the appeal. It was a messy story and we are not in a position to say who’s right or wrong. Our focus here is on HC Surgical as a stock. However, you must note that Julian Ong is still with the Group and you can stop reading further if this fact offends you.
HC Surgical’s endoscopy business hasn’t been affected by the scandal and revenue has rose 12% while earnings jumped 100% (partly due to a fair value gain on financial assets).
The earnings improvements have lowered the PE ratio to about 10, which is below the average historical PE of 32.
It seems to me that the scandal had more impact to the share price than the underlying business. The share price tanked from the high of S$0.65 to as low as S$0.29.
The good half-yearly results should be the reason behind the recent price rise.
Healthcare service is an undervalued sector
To me, it is quite normal to for health care sector to trade above PE 20. But here I provided you 3 stock which are trading below PE of 20 (except one reported a non-cash loss). There have been some signs of buying and this may be a signal that the attention is back on healthcare stocks. I might be wrong and we can’t really tell when the stocks are going to go up. We can only have the discipline to buy when they are a good deal and patiently wait for the upside to come.
If you want more healthcare stocks, I covered TalkMed in this previous article in more detail.
Disclosure: I have positions in TalkMed, Singapore O&G and Singapore Medical Group. This is not to be taken as investment advice. Just sharing of views. Think for yourself as our investment objectives, risk appetite and preferences differ.
