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Thomson Medical Group: Medicated by Leverage

We initiate our coverage of Thomson Medical Group (TMG). The acquisition of Thomson Medical Centre (TMC) together with TMC Life Sciences Bhd (TMCLS) by Rowsley Ltd. in 1Q’18 has changed the fortune and checkered past of Rowsley, in our view. With the divestment of its loss-making real estate investments in January 2019 and name changed to TMG, TMG is now a pure healthcare play on a clean slate.  

TMG’s strength lies in TMC/TMLCS as one of Asia’s largest healthcare players with a focus in the Obstetrics & Gynaecology (O&G) markets in Singapore and Malaysia. Revenue drivers going forward include (1) its premier private hospital status in Singapore, (2) TMSCL’s expansion in Kuala Lumpur, and (3) the new hospital development in Johor Bharu.

We see the first driver as a cash cow on TMC’s focus on oncology and preventive health as the next pillar of growth in the medical industry. COVID-19 patients could have further complication due to diabetes, high blood pressure, or heart problems. Thus, we expect preventive healthcare to grow in importance whether or not COVID-19 stays with us. We see the latter two drivers as promising in Malaysia’s much larger market (compared to Singapore) with the triple expansion of capacity at Thomson Hospital Kota Damansara near Kuala Lumpur to generate revenue by 2021, and the potential to draw Singaporeans to visit hospital facilities in Johor Bharu when the facility will be completed in 2026. We like the long-term prospect but are cautious in the next 2-3 years as capex for the Malaysian projects can worsen the liquidity situation at TMG. Our base-case scenario calls for patients worldwide to be postponing non-essential medical procedures and even parenthood that could reduce TMG’s revenue growth, to say the least.

TMG’s balance sheet is highly levered stemming from the side effect of the acquisition which, in our view, encouraged management to maximize return on shareholders’ equity for the publicly-listed stocks with additional leverage. We expect its liquidity and EBITDA to just sufficiently cover its cash outflow and would see additional capital injection as credit-positive in the future.