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-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.

About Singapore Medical Group Ltd (SMG)
Singapore Medical Group Ltd (SMG) operates medical clinics and provides medical services. The group operates through 3 segments: health, aesthetics and diagnostics.

About Cancer Centre Pte Ltd
Cancer Centre is a company incorporated in Singapore on 26 December 2007 with its principal activity being the provision of screening and treatment of general cancer services. They operate at Paragon and Mouth Elizabeth Novena. SMG is already an 80% stakeholder of Cancer Centre, with Dr Wong Seng Weng (founder and director of Cancer Centre) holding the other 20%.

Financial Performance of Cancer Centre Pte Ltd

Revenue increased by 11.3% due to increasing patient volumes. SG&A increased due to marketing efforts to promote services. PBT increased by 12.6%.
The assets of Cancer Centre comprised mainly: (i) receivables due from related companies of S$3.69 million; (ii) cash and cash equivalents of S$3.14 million; (iii) inventories of S$0.61 million and (iv) trade receivables of S$0.59 million, representing 45.0%, 38.3%, 7.4% and 7.2% of Cancer Centre’s total assets respectively. The liabilities of Cancer Centre comprised mainly: (i) trade payables of S$1.09 million; (ii) payables due to related companies of S$0.77 million; (iii) other payables and accruals of S$0.35 million; and (iv) income tax payable of S$0.31 million; representing 42.7%, 30.1%, 13.7% and 12.1% of Cancer Centre’s total liabilities respectively

Agreement Terms
Under the sale and purchase agreement, SMG is going to acquire an additional 10% of Cancer Centre Pte Ltd in exchange for some newly issuing SMG shares. The total price is $2.92m, or $58 per Cancer Centre share. 5,392,428 SMG shares will be issued as consideration at an issue price of approximately S$0.5415 per Consideration Share. The issued shares represent 1.3% of the existing share capital of SMG.
SMG does not intend to introduce any major changes to Cancer Centre after the acquisition, but merely financially benefit from a greater stake in Cancer Centre. Dr Wong will still retain a 10% stake for performance incentive purposes.

Calculations

Based on RHT Capital’s comparable acquisitions, the P/E of 10.0 and P/NTA of 5.2 are about average. Some comparable transactions may include the acquisitions of a controlling stake in the target companies. Such acquisitions may also include a premium for the controlling stake of the company. This is not the case for this acquisition.
This acquisition is highly EPS accreditive. The earnings attributed to this 10% stake is $292,000. Total SMG earnings stand at $3,043,000. Hence, SMG is able to increase its earnings by 10.6% while only diluting 1.3% of share capital.
The effect of total EPS and NTA are as follows:

Macro
Refer to http://blog.investingnote.com/2017/05/26/s… for a sector overview of the Healthcare industry in Singapore. For cancer in particular:
+ More Singaporeans getting cancer/terminal diseases at a 4.74% CAGR

+ Rise in demand for quality private healthcare in tandem with aging population, higher incomes, sedentary lifestyles and private insurance coverage

Micro
+ Part of a greater picture for acquisition-fuelled growth, including Lifescan Imaging, Astra Women’s Specialist Group, CHA Heathcare Co. Ltd, Children’s Clinic Centre Pte Ltd. and Kids Clinic @ Bishan Pte. Ltd. Most acquisitions are transacted at a lower valuation than SMG, and thus EPS accreditive.
+ SMG entering into new medical segments such as diagnostics and paediatrics. This acquisition will increase its exposure to cancer screening and treatment.
+ Management seems to be astute and experienced in identifying, executing and integrating M&As based on past precedence. In particular, SMG chairman Tony Tan Choon Keat was the founder of Parkway Holdings, and have extensive experience in acquisition-led growth for Parkway Holdings.
+ SMG’s rapid share price rise means that it is now cheaper to issue shares as consideration for M&As, creating a situation in which a 10% accretion in earnings for only 1.3% of existing share capital can occur.
+ No change in operation of Cancer Centre, no execution risks.

Conclusion
Very bullish on this additional 10% acquisition in isolation. Only has significant upside as SMG is able to partake more in Cancer Centre’s excellent financial performance while paying a reasonable consideration price and with zero additional execution risks. Cancer screening and treatment remains a growing medical segment, and Cancer Centre has been gaining in visibility and patient volume faster than the long-run increase in cancer patients. I believe that this acquisition will bring about benefits to SMG’s minority shareholders.
My personal recommendation is for shareholders to vote in favour of this transaction. DYODD.

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