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raytoei is a Corporate Ronin in a US technology company based in Singapore. When he is not selling brand spanking new hardware to clients, he can be found reading and writing about the market. raytoei's investment process involves a healthy dash of skepticism, superior analysis and bargain... More
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  • Doing Some Back-Of-Envelope Analysis: IBM

    Back-of-envelope analysis on IBM (IBM)

    IBM's trailing twelve months Earning Per Share is currently $14.09, while the current share price is hovering around $185. This short article is an attempt to do a back of envelope calculation of how the market is pricing IBM share price.

    How would you price the IBM Shares if the EPS were to suddenly stop growing and stay at $14.09 forever ?

    Well, one finance formula would be EPS / WACC

    where WACC = weighted average cost of capital. Several finance websites put the range between 8.1% - 9.6%

    As a rule of thumb, I usually use 9% for Dow Components, 12% for large caps, 15% for Internet Companies. IBM is a Dow Component, however for consistency with past calculations, I use a more conservative number WACC of 10.5%.

    So with WACC of 10.5% and EPS of 14.09, if IBM EPS were to stay stagnant forever, the share price would be 14.09/10.5% or $134.19 per share.

    To fine-tune it further, we could assume some sort of long-term growth, according to the CIA World Factbook, the real World GDP growth for the last ten years shows a low of -0.7 in 2009, a high of 5.3% in 2006 and an estimated growth of 3.3% in 2012. I would tag a more conservative 3% long term growth for IBM, more than half of its revenue comes from outside of the US.

    So assuming a long term growth of 3%, IBM is value at EPS/(WACC - growth) or 14.09 / (10.5% - 3%) = $187.86 per share

    IBM current share price is $185 (approx.). This tells me that the market isn't optimistic that IBM can grow faster than 3% a year over the long term.

    Perhaps investors have concerns with the new CEO, or they are not convinced that IBM can grow meaningfully with an annual sales 102 billion, or perhaps investors simply prefer other fast growing companies engaged in Cloud Computing.

    Let's look at IBM Earnings Per share over the last 10 years:

    Year

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    TTM

    EPS

    4.34

    4.94

    4.91

    6.06

    7.18

    8.93

    10.01

    11.52

    13.06

    14.37

    14.09

    Over period of 2012/2011, IBM EPS grew 10%
    Over three years, it grow 12.8% annually
    Over five years, 14.9% annually and over last 10 years, 16.7% annually

    So the question is, is it reasonable that IBM EPS can grow at least 10% a year over the next 10 years ? I think the answer is quite positive, especially given that they have shrunk the number of shares outstanding with buybacks over the similar ten year period, 1756 million shares outstanding in 2003, and around 1130 million shares recently.

    So, let's revisit the scenario again, let's assume IBM EPS would grow 10% a year for five years and then drop to 5% a year for the next five years, and finally a 3% long term World GDP growth.

    Using a simple two-stage DCF calculator, the share price works out to $275.29. This is a premium of almost 50% to the most recent share price. If I were to assume ten years of 10% EPS growth, the number is even more impressive.

    In conclusion, I think the market is mispricing IBM shares, it is pessimistic that IBM can grow, while its track record shows that IBM has grown its EPS quite impressively in the last ten years. I believe IBM is worth at least $275 based on conservative growth rates, this is a premium of nearly 50% and a margin of safety over today's price of $185.

    raytoei

    ps. I didn't get into any analysis on IBM's products, business or marketing plans. These would be the important next steps if I were to seriously consider investing in IBM as these factors would determine whether IBM can grow the EPS or not. What I am merely doing in this article is just a back-of-envelope calculation of how the market is pricing IBM.

    pps. Any DCF analysis is fraught with issues. And my calculation is no exception, it can be problematic because of a number of assumption I used, eg. EPS as a proxy for Free Cash Flow, use of trailing twelve months results versus forward numbers, use of world GDP growth rates as a proxy for company long term growth rates etc. However the key is to be consistent in the calculation, and err on the side of being conservative. It is better to be roughly right than be precisely wrong.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: IBM, long-ideas
    Aug 23 11:38 AM | Link | Comment!
  • Things That Interest Me In The Month Of Feb

    I was watching several stocks in the month of Feb:

    * Avon Products AVP

    * Moody's MCO

    * Sony SNE

    * Western Union WU

    (a) Avon Products

    I bought AVP a year back when the CEO came in and the AVP board rejected a buyout from a Coty. Everything was wrong about the company, the investigation of some transactions, a failed ERP implementation, a CEO (Now Chairman)who liked the glamour but didn't fit the selling model of AVP. I bought because of the new CEO. Ms McCoy was a 30 year veteran of J&J, and gave up around 12-18m USD of retirement benefits plus stock options to run AVP. I really didn't know the motivation for joining AVP but as a Vice-chairman of one of the J&J divisions, she would be a credible candidate for running AVP. One year later, AVP still had lackluster results but the company seemed to have stabilized. I do expect 2013 to be the year where AVP will continue to stabilize and hopefully grow. I am not going to add my position but neither am i going to sell it.

    (b) Moody's

    I wrote the following on 8th Feb after the announcement that the US Govt was suing S&P:

    + Quite a good moat, not easy to replicate or displace. Only 2 other competitor.

    + US Govt not going after it unlike S&P (MHP stock ticker)

    + Even if it settles, it will be 1bn with US Govt (1bn was the asking price to S&P)

    + Stock is down around 15-20% from peak recently.

    - If it settles with Govt, it may open up to more lawsuits from banks.

    - Even at current price, it may not be cheap enough (needs more analysis)

    Additional Notes I added on 9th Feb:

    * If the US Govt wants to teach a lesson, it will kill off one not two out of three parties. Moody's will dodge the bullet.

    * Strong quarter. all cylinders firing.

    I added onto my existing position after a report, ""When a company such as Moody's is facing a potential existential threat, investors are going to be must less focused on how the numbers look in the quarter that just ended," he said, adding that the legal overhang raises questions about business volume, client and employee retention and cost of capital."

    (c) Sony SNE

    Sony stock fell after announcing the new PS4. Key concerns were:

    - 10 more months until holiday season

    - No console shown, no pricing announced

    Most analyst panned it, saying that Sony's business was flawed and declining because it could not compete with Apple's apps store. The annual decline of consoles sold was a worrying factor.

    + PS3 is 6+/7 years old. There is a pent-up demand for the new console from a loyal base of gamers.

    + PS4 graphics and networking ability (Sharing control and screen, preview of upcoming games, off-line downloads) is beyond the technology of existing handheld devices. Windows or Mac OS doesn't have an integrated launch-point for gaming with these features yet.

    I initiated a small position as the market will slowly digest these facts and I expect the price to be volatile.

    (d) Western Union WU

    WU hasn't recovered since 40% of the agents were dropped last quarter in 2012. I see this as a one-off situation, as WU cleans up and tightens the compliance. As the largest brand for remittances, I find WU an attractive alternative to no2 Moneygram.

    Disclosure: I am long AVP, WU, SNE, MCO.

    Tags: AVP, WU, SNE, MCO
    Feb 24 7:04 AM | Link | Comment!
  • Singapore Medical Group: A Growth Stock








    Name: Singapore Medical Group
    Ticker: 5OT
    Board: Catalist, Singapore Stock Exchange
    Recent  Shareprice: 0.235
    Recent Market Cap: 34.5m
    P/E Trailing 12 Months: 10.44
    P/S Trailing 12 Months: 1.11
    EV/Sales Trailing 12 Months: 1.02
    Tangible Book Value: 20.4
     
    Rating:         Speculative Growth
     
    Disclosure: I currently have a small position in this stock. This report was written as part of my due diligence and is meant for my own consumption. I welcome all feedback at raytoei@gmail.com  

    You can download the PDF version here:
    http://retro.ms11.net/smg-raytoei.pdf
     
    23rd August 2009: First Draft:
    27th August 2009: Corrected for Typo
     
     
     
    1. Company description
    Singapore Medical Group is specialty healthcare provider focusing on Laser Vision Correction procedures and in the past 18 months has branched into Eye Care, Sports medicine, Aesthetics, Critical Care. The company went public in late July 2009, and is listed on the sponsor-supervised Catalist board in the Singapore Stock Exchange.
     
    Clusters
    Eye
    Aesthetics
    Sports Medicine
    Critical Care
    Started Since
    2005
    2008/2009
    2008/2009
    End 2007
    Products and Services
    Refractive Surgery.
     
    Treatment of Presbyopia, Cataract, Glaucoma.
    Breast, facial Fillers, Vaser Liposelection, rejuvenation, Botox and Dental care.
    Treatment of sports or exercise-related injuries.
    Chemotherapy         Targeted Therapy
    Biological Therapy
    Clinics
    1.Lasik Surgery Clinic,
    2.Premium LSC and
    3. The Eye and Cornea Transplant Centre.
    4. Singapore Vision Centre
    Location: Paragon Medical 
    1. Dental Studio at Paragon
    2. Singapore Lipo, Body & Face Centre
    3. SingaporeAestheticCenter
    Location: NovenaMedicalCenter
    1. SportsMedicineCenter,
    2. Sports Orthopedic Surgery
     
    Location: NovenaMedicalCenter
    1. Cancer Centre at Paragon
    Table 1: SMG Services and Clinics

    Regarding the EYE cluster which currently contributes 85% of the business, SMG believes that it has the largest marketshare of the refractive surgery. Of which about 30 thousand refractive surgeries are currently performed in a year. The number of procedures by SMG is about 1500 a month, or 16k in 2007 and 18K in 2008. The chief competitors listed in the prospectus are SNEC, Parkway and Tan Tock Seng.
     
    The success of SMG is credited by management to the following factors:
     
    • A highly scalable  process of letting the doctors focus on the surgical procedure and follow-up, and unencumbered by administrative matters, while letting everything that can outsourced be handled by highly trained professionals. This way, a doctor can handle up to 500 patients in a month unlike the industry norm of 100 ~ 150 per doctor a month. The doctors are employees but are also highly incentivized.
     
    • A focus on higher standard of care provided. To justify the price premium for its service, SMG employs the best doctors in the industry, professional nurses undergo extensive training, and superior top-of-the-line machines are utilized. This has resulted in reducing the number of costly post-op enhancements; SMG claims a rate of 1 in 10,000 post op enhancement versus 1 in 1000 enhancements which is the industry norm.
     
    • A strong focus on branding and marketing. Being a specialty health-care provider, SMG is choosing its sandbox carefully. The two growth areas are the EYE and AESTHETICS clusters, while SPORTS and CRITICAL CARE are diversification strategies with niche addressable market-space. SMG feels that EYE scales vertically within the two clinics, while AESTHETICS is more retail-driven and scaling horizontally across more clinics. The company expects to open 8 more AESTHETICS clinics in 2010, with a minimal staff of a doctor and 2 nurses, and an annual turnover of about 2m per clinic. The competition identified comes mainly from beauty parlors.  
     
    2. Industry Peer Analysis
     
    TLC Vision Corp. (TLCV)
     
    LCA-Vision Inc. (LCAV)
    Vision Group LTD
    (30 June FY)
    Shinagawa
    (Private Company)
    SMG
    (50T:SGX)
    Country
    Canada & US / USD
    US
    USD
    Australia
    AUD
    Japan
    USD
    Singapore
    SGD
    Recent Market cap
    13m
    94m
    A 59.87M
    -
    35.0m
    Rev 2008 
    276
    205
    A111.3m
    -
    30.1m
    Rev TTM
    255
    151
    A111.6m
    -
    30.9m
    Gross Margin (Avg 3 yrs)
    30
    59.47
    49.7 %
    -
    69.3%
    Gross Margin (NYSE:TTM)
    27.1
    32.7
    48.2%
    -
    57.2%
    Oper Margin (Avg 3 yrs)
    -8%
    11.27%
    21.16%
    -
    32.6%
    Oper Margin (TTM)
    -33.3%
    -21%
    18.1%
    -
    13.1%
    Free Cash Flow (Avg 3yrs)
    17.3n
    21m
    A16m
    -
    5.33m
    Free Cash Flow (TTM)
    -5m
    12m
    A10m
    -
    5.67m
    Clinics (Refractive)
    68 + 100 other sites
    78
    7
    5 Clinics in Tokyo, 1 in JV in SGP
    2 (LSC + Premium)
    3 in Phil.
    Clinics Others
    300 sites
    -
    33
    -
    8
    Doctors
    11000 affiliates
    Total 700 employees
    42 + 30 visiting surgeons
    144 of which 44 Fulltime
    3 (NYSEARCA:LSC)
    Procedure Volume (2008)
    73.8k.
    Incl affiliates: 123k
    115k
     
    238k
    (290k est. for 2009)
    18k est.
    Procedure Volume (TTM)
     
    87k
     
     
    1.5k a month
    Marketshare
    15% (US)
    12% (US)
    Largest ophthalmic service
    provider
    65% of JP marketshare
    65% (30k procedures annually )
    Listed Price Listed 
    (both eyes)
    Not Listed
    USD 2,000 onwards
    Not Listed
    USD 2700 ~ 3600 before Disc
    A6,500.000
    Excluding 20% rebate
    USD 2000 ~ 2400 in JP.
    SGP 2388 in SGP Clinic
    SGP 2098 ~ $3,888 depending on machine.
    Promo Price Listed
    (both eyes)
    12 months interest free
    $400 rebate
    12 months Interest Free
     
    3yrs Enhancement warranty
    Financing Options
     
    Yes
    Yes, through GE Care Credit
     
    Yes. 12 months
    Insider Ownership
    7.4%
    18.23%
    30% (doctors are partners)
    -
    83%
    Table 2: Major Laser Vision Correction LVC companies world-wide
     
    3. TOWS Analysis
     
    Strengths
    a. Strong cash generator with little long term debt
    SMG exhibits the characteristics of a micro-cap growth stock: A strong balance sheet with little long term debt and a growing cash position (it increased a million in the past six months to nearly 3m) against a backdrop of lumpy earnings with strong revenue growth. The Tangible Book Value is negligible at $0.0114 per share or 5% of share price; this gives a huge but somewhat meaningless ROE value of 207.8%
     
    b. A Unique business model with a first mover advantage
    SMG isn’t the first provider in the premium healthcare segment. However its separation of management and clinic functions is unique. SMG’s focus on the more regulatory-relaxed aspects in Refractive Surgery, Aesthetics, Sports medicine allows it to advertise and market it better than most. Its early mover advantage ensures that the branding is intact.

    Weaknesses
    c. Unknown and untested outside the LasikSurgeryCenter, it must execute flawlessly.
    As a micro-cap with a market capitalization of roughly 35m, SMG is dwarfed by the other medical groups with bigger resources and deeper pockets. It must continue to pick and define its market and move faster than its competitors.  SMG is still not widely known and the operating history is linked mainly to LasikSurgeryCenter since 2005, the other clinics were only recently acquired in the past 18 months.  According to the prospectus, the Eye Cluster contributed about 85.2% the total 2008 revenue ofS$30.1m, while the other medical clusters contributed S$4.4 million.
     
    d. Execution and Ownership issues
    According to the prospectus, the Chairman and CEO control about 72% of the company, and all insiders control about 82% of the company leaving about 17+% outstanding to the public. Furthermore, the Chairman, CEO and an EVP are related. While this aligns the major shareholders to the performance of the company, it nevertheless could cause volatility in the market if the owners were to sell the shares after the restrictive period. Institutional investors may avoid investing in this company due to guidelines on corporate governance and % shares outstanding.
     
    Opportunities
    The key opportunities are:
     
    e. Addressable market of the Laser Vision Correction in Asia is underserved
     
    Asia suffers from high rates of myopia, this problem is more acute among Singaporean young adults, where myopia affects 65% to 82.2% of the population (average of 74%) depending on ethnicity. (See Appendix V).
     
     
    General
    Population
    Myopic Population
    Eligible for LVC
    No. of Eligible Procedures
    (Single Eye)
    Est. LVC for 2009
    Penetration rate / Pop
    Penetration rate / Eligible
    US
    304.1m
    43%
    45%
    112.46
    400k
    0.2302%
    1.245%
    Japan
    127.2m
    55%
    45%
    60.17
    1400k
    0.1572%
    0.665%
    Singapore
    4.6m
    74%
    45%
    2.93
    30k
    0.3261%
    1.025%
    LVC: Laser Vision Correction. Eg. LASIK                      
    Procedures refer to Single Eye
     
    The above table is an attempt to calculate the % penetration for those that are eligible. I used the population myopic rate from the “Myopia Manual”, the estimated 2009 Procedures are also drawn from several sources. 
     
    Lacking sufficient data for Singapore and Japan eligibility for LVC, I pegged the % as the same to the US rate which is 45% of the myopic population (column 4).
     
    The penetration rate is still quite low for Singapore, only 1% of the Eligible procedures are performed. Since there is an annual replacement rate, I would regard the 30K for Singapore to be at least stable or growing as Lasik becomes more popular.
     
    The US topped out at 1.4m procedures in the year 2000 and variances around the 1.4m depended on consumer sentiments. From this simple indicator, it would suggest that Japan at 0.67% still has a higher growth prospect than Singapore 1.02%, since Singapore could approach the US saturation rate of 1.245% sooner than Japan. 
     
    Key factors affecting this eligibility rate would be (a) population age group since Singapore has a younger population than the US or Japan, and the recommended age for the Laser Vision Correction is between 20 to 40yrs old, though in the US the average patient is about 40 yrs old, presumably due to (b) higher disposable income.
     
    According to the often quoted Market-Scope, the global demand for Laser Vision Correction is expected to grow at a Compound annual growth rate of 5.4% till 2013; this is taking into consideration of the 2008/2009 decline and a quick rebound afterwards.
    Fueling the growth will come from Japan and emerging markets, including China and India.
     
    Threats
     
    F. Threat of Increased competition and a spiraling Price War
     
    Please refer to the Appendix I for a 2008 late-May article in Business Times. In that article, no less than eight Lasik centers were mentioned about a looming price war that threatened to compress margins and steal away potential customers.
     
    The business of refractive surgery has high fixed and operating costs that make it expensive to start and operate. According to the 1999 book “Refractive Surgery” by Helen Wu et al, a small practice will need 400 procedures to break-even (see table below), this is before considering a profit or doctor’s fees. What is interesting about the table below is that while the cost per eye has dropped below USD$1500 a procedure since it was published, the rate of inflation has increased the costs, pushing the breakeven point to > 400 procedures. (In addition, for the popular IntraLase Lasik procedure, two machines are required, one for bladeless cutting and the other excimer machine for reshaping the cornea are required)




















    This business is about economies of scale; it is also self-reinforcing, the highest paid in-demand surgeons also have the most experience. New entrants will have to pool resources while creating brand awareness for their service.  
     
    The biggest threat will come not from small practices but established ones who can scale, in this aspect, Shinagawa Lasik (A joint venture with SNEC) is probably a bigger threat than the other identified competitors listed in SMG’s prospectus (Parkway Eye Centre and Tan Tock Seng Hospital). Shinagawa Lasik is the market leader in Japan with 237k procedures performed in 2008 in Japan. While it is a late entrant in Singapore, it is polished in marketing as well as providing an overall pleasant patient experience which is important since word-of-mouth referral and reputation are the key marketing strategy. Anecdotal evidence from the net suggests high customer satisfaction for the Shinagawa Lasik clinic. Shinagawa has a stated aim of achieving 2,000 procedures monthly and capturing half of the 30,000 procedures done locally. (Source: http://www.shinagawa.com.sg )
     
    Please refer to Appendix II & III on the patient costs of a Lasik procedure in Singapore and the US. The prices among the clinics in Singapore are competitive, and the differences are within $200 ~ 400 for both eyes for the most popular procedure, IntraLase Lasik. The prices in Singapore are some of the lowest in developed countries.  
     
    In countries such as the US, the prices has risen steadily, See Appendix IV. This can be attributed to customers choosing more expensive but better technology, eg. Blade versus Non-Blade (IntraLase) procedures. Wavefront versus Custom procedures.   So while the threat of price discounting is real, this is off-set by customer trading up to better technology to reduce the rate of enhancements or infection.
     
    G. Threat of a Recession
    Despite the recession-resistant nature of healthcare industry, not all providers are coping well with the downturn. For example, Pacific Healthcare is similar to SMG in that it is focused entirely on the ambulatory, outpatient specialist services in cosmetic surgery, dentistry and aesthetic medicine. It is also asset light with low capex and high ROE. However, since its aggressive expansion in 2007, it is increasingly cash-constrained in this downturn, it has cancelled a dividend payout, and has stated that it intends to issue 15% more shares to shore up working capital; investors have fled in the past year.
     
    LCA-Vision, one of the largest refractive surgery providers in the US reported a 38.4% dip in the number procedures in 1H 2009. From a recent presentation, they highlighted a direct correlation of consumer confidence and the nos. of procedures performed.
     






















    In
    Singapore, a Feb 2009 report by Deutsche Bank on the patient admission rates in Singapore shows a steeper decline in private admissions during the previous 2 recessions with a drop of 23% and 8% during the Asian Financial Crisis and Dot com bust respectively. They foresee a drop of 15% during this current crisis.
     
     
     

























    4. How much is
    SMG worth?
     
     
     
     
     
    Recent Price
    Market Cap
    P/S TTM
    EV/REV
    TTM
    P/FCF
    EV/FCF
    P/E
    Parkway
    1.860
    2,097m
    2.140
    2.770
    57.230
    74.800
    37.165
    Raffles
    1.190
    617m
    2.970
    2.820
    15.540
    14.730
    17.917
    Healthway
    0.130
    178.5m
    1.853
    1.999
    7.866
    8.489
    13.536
    Pacific
    0.105
    29.48m
    0.370
    0.290
    N/A
    N/A
    N/A
    Average
     
     
    1.83x
    1.970x
     
     
     
    SMG
    0.235
    34.2m
    1.110
    1.020
    9.150
    8.440
    10.440
     
     
     
     
     
     
     
     
     
     



































    Table 5: Sector Comparison in
    Singapore
     
    For valuation, rather than compare SMG with the worldwide peers, I chose to compare SMG against healthcare companies in Singapore as there is a higher correlation of stock performance to local sentiments towards the healthcare sector.
     
    Since SMG is a fast grower with inconsistent earnings and a short operating history, it is more appropriate to measure SMG based on a Revenue multiple. Also, whole firm Enterprise Value is used rather than just the Price (or Market cap), as whole firm valuation takes into consideration the cash and debt position of the company. (EV is measured by market cap + debt less cash).  
     
    To account for the latest reported performance, trailing 12 months (TTM) data is calculated from the latest 1H2009 results and re-constructed 2H2008 figures for sales, earnings and free cash flow.  (Free Cash Flow (FCF) is commonly defined as Operating Cash Flow less Capital Expenditure).  
     
    The average sector multiple is a 1.97 times revenue.  This gives an implied value of $0.43 per share for SMG. This is 85% above the recent price of 0.235.
     
    Calculation:
    Implied Enterprise value of 1.97 x TTM Revenue = 60.78m
    Implied Market cap = 60.78m + Cash of 2.93m – LT Debt of 0.291m = 63.43m
    Implied Price per share = 63.43 / 145.73m = $0.435
     
    5. How to think about the current and implied price and the catalysts.
    As a newly listed company, SMG is trading at only a small premium to its IPO price, in my opinion the share price is weighed down by 1. investor neglect, 2. concerns about the economy and the healthcare sector, and 3. a perception that the lack of strong tangible book value will provide little downside protection to investors.
     
    As a fast grower, SMG is a game changer in this industry. While  other players strives to be an one-stop shop, SMG is picking its niche carefully and has chosen to put its growth in EYE and AESTHETICS, and SPORTS & CRITICAL ILLNESS as diversification strategies. 
     
    SMG as a high quality micro-cap that is undervalued. Without a long operating history, I rate it as a Speculative Growth stock because much of its value comes from its ability to grow in the future and translate those growths into free cash flow. The catalysts which will unlock the price are:
     
    • Institutional coverage and ownership of the shares. SMG is below the radar of most brokerage houses, this will change as SMG continue to execute its unique business plan and expand in the other clusters, especially Aesthetics, and start taking marketshare away from the other players.  
     
    • Economic recovery and improved market sentiments towards the healthcare industry. As Laser Vision Correction is an elective surgery, refractive surgeries will rise when the economy picks up and consumer discretionary spending increases.  Back in 2005, 2006 and 2007, the market was more upbeat about the sector, and sold at multiples between 50% ~ 100% higher from today’s levels.  (see table 6)

     
    EV/Sales
    2005
    2006
    2007
    Current TTM
    Parkway
    5.3
    3.4
    3.4
    2.78
    Raffles
    7.2
    6.0
    4.9
    2.82
    Thomson
    4.6
    4.1
    3.6
    -
    Pacific
    2.4
    1.8
    -
    0.37
    Healthway
    3.0
    2.9
    2.7
    1.99
    Simple Average
    4.5
    3.64
    3.65
    1.99
    Average w/o Pacific Health
    5.025
    4.1
    3.65
    2.53
    SMG
    -
    -
    -
    1.02
    Table 6: Historical Valuation, Source: 2005 ~ 2007 data from CaseNove, Nov 2007
     
     
    6. Conclusion
     
    SMG is a fast grower in a healthcare industry with a business model that is highly focused on marketing. Its two main key pillars are the the EYE Cluster and AESTHESTIC cluster. It is high quality and targets the premium segment, it is also undervalued with an implied intrinsic value of $0.43. As a growth stock, much of the value is derived from its ability to execute and generate future cash flows. SMG has a SPECULATIVE GROWTH rating.
     
    Other areas not covered in this report include the Dividend policy, Aestheric medicine opportunities in Asia, other EYE cluster opportunities eg. presbyopia.

    Appendix I:  
     
    Lasik prices slide, with eye on competition
    By Chen Huifen
    31 May 2008
    Business Times Singapore
    Hints of price war, ad blitz as new players burst onto the scene
    (SINGAPORE) Competition in the Lasik surgery sector seems to have intensified recently with the entry of new players and eye-popping promotional rates tied to marketing campaigns.
    In the past month alone, there have been weekly advertisements by eye clinics in various media, with some displaying their prices and add-on services. Industry observers noted that a price war may be underway, though the players involved are denying this.
    Parkway Eye Centre, for instance, started publicizing in end-April its $995-per-eye package for standard Lasik surgery. The fee, before GST, includes an evaluation and three post-operation reviews. According to centre medical director Lee Hung Ming, it would have cost about $1,600 per eye without the promotion.
    'Parkway sees the potential in the Lasik market in Singapore,' said Dr Lee. 'Price adjustment is one of our strategies to expand the Lasik market and to allow more people to enjoy the benefits of Lasik in a premier hospital at an affordable price.'
    The Lasik Surgery Clinic followed suit in mid-May with a package of $2,188 for both eyes. The new rate is about 21 per cent lower than its last publicized price of $2,780. On top of that, it boasts of installment payment plans and no-waiting list, and is open 365 days.
    'Over time economies of scale, operational cost efficiencies and advances in technology have provided us with cost savings, which we readily pass to our patients by reducing the cost of procedures,' said Cheryl Baumann, president of the Singapore Medical Group, parent company of The Lasik Surgery Clinic.
    Meanwhile, at least two new practices offering Lasik surgery have opened in the last two months.
    Shinagawa Lasik Centre, a tie-up between Japan's Shinagawa, Capitol Optical and SNEC Eye Associates, launched a $4 million, 6,000-sq-ft facility last month, offering a price of $2,388, before GST, for an IntraLase blade-free procedure on both eyes.
    Another new outfit, Singapore Eye & Vision, has also opened at the Paragon. Fronted by three doctors - Francis Oen, Wee Tze Lin and Bobby Cheng - who left the Singapore National Eye Centre recently to set up the private practice, the group placed advertisements in the local media without indicating its price, saying that it is merely an exercise to inform their patients that they have moved.
    Asiamedic chairman Low Cze Hong said his group may consider offering a one-off Lasik promotion in the coming months in response to the market situation.
    'We will certainly look at it, depending on which angle the market is moving,' added Dr Low. 'We will respond accordingly. If necessary, we will have a package that is outstanding to get attention for a while.'
    Those who are not taking part sensed that the avalanche of publicity and promotion could be a strategy for the bigger set-ups to gain market share. It is also a reflection of relaxed advertising rules for medical practitioners, as they keep up with the trend in the region.
    Even Tan Tock Seng Hospital Lasik Centre started publishing its price ($1,190 per eye), and Eagle Eye Centre, a smaller ophthalmology outfit, also made known the availability of a new machine through an advertisement earlier this month.
    'I know there have been a lot of ads coming around because of the competition, even pre-empting the competition,' said Julian Theng, a consultant ophthalmologist and medical director of Eagle Eye Centre. 'It's probably, in a way, like a panic reaction, knowing that a player is coming up with low cost. So others are coming up with low-cost packages as well.'
    However, Asiamedic's Dr Low warns that downward price adjustments by his group, if any, will only be temporary as competition based on price alone will not be sustainable in the long run. With laser machines costing some $1 million to $1.5 million each, doctors would have to do higher volumes to justify the costs.
    Already, margins for Lasik surgery have been coming down in the past few years, with falling prices resulting from a combination of better technology and competition in Singapore and from the region.
    That also explains why the number of Lasik procedures carried out in Singapore is on the rise. Official growth statistics are not available, but The Lasik Surgery Clinic carried out Lasik procedures on 16,089 eyes last year, up from 2,771 in 2006. Anecdotal accounts from private sector eye doctors here put the proportion of foreign patients undergoing those procedures at between 5 per cent and 20 per cent.
    'There is still potential for growth as about half of the Singaporean population has myopia,' added Parkway Eye Centre's Dr Lee.
    Jerry Tan of Jerry Tan Eye Surgery said the ongoing competition gives consumers more options, much like how budget airlines can co-exist with full-service airlines. But he cautioned against going down the US route, where aggressive advertising and irresponsible claims have led the authorities to clamp down on physicians. Besides, every eye is different and consumers should do extensive research on the quality of healthcare delivery, the experience of the surgeon, and the type of technologies available at each centre before making up their minds.
    'Competition is good to a certain extent,' said Dr Tan. 'But when people start to do things like up selling, then it becomes unsavory.'
    If price competition continues, it may also contradict Singapore's approach in its positioning as a medical tourism hub. The medical fraternity here has always prided itself on placing greater emphasis on quality of care rather than price, in response to emerging medical tourism cities in the region that offer cheaper alternatives.'I would be wary if it's really too cheap,' he said. 'They are either going to upsell you or they are going to cut lots of corners . . . So do your homework - go down and see the place.'

    Cost of LASIK in Singapore
    The purpose of the table below is to give our readers an idea about the cost of LASIK and how much they differ between the clinics. It is based on information published on the respective websites (the other clinics did not publish any prices) and shows the cost of LASIK per eye.
    Note: LASIK is considered "cosmetic", hence, not eligible for government subsidies or
    Medisave.
    Legends:
    R - the number of post-op reviews.
    E - cost of enhancement (if necessary, due to overcorrection or undercorrection).
    M - cost of medication.


    Clinic
    Service
    Cost
    R
    E
    M

    The Lasik Surgery Clinic
    Custom Lasik (Microkeratome)
    Wavefront Lasik (Microkeratome)
    Custom Lasik (IntraLase)
    Wavefront Lasik (IntraLase)
     Epi-Lasik (Mikrokeratome)
     
    S$1,094
    S$1,444
    S$1,294
    S$1,944
    S$1,889
     
    3




     
    S$275




     
    S$45




     
    Shinagawa LASIK Centre
    Lasik (IntraLase)
     
    S$1,198
     
    3
     
    3 yrs
     
    S$30
     
    SINGLASIK Centre
    Standard Lasik (Microkeratome)
    Standard Lasik (IntraLase)
    S$975
    S$1,195 
    2 yrs
    N/A
    ClearVision Eye Clinic
    Standard Lasik
    Wavefront Lasik
    Epi-Lasik
    S$838
    $1,188
    $1,388
    3

     
    3 yrs

    Incl.

    Additional Information:

    1. Most clinics offer Lasik with a choice of Microkeratome or IntraLase. The difference between them is the former uses an oscillating blade to create the corneal flap while the latter uses laser, which is a more precise method that is known to result in less complications and patients reporting better overall vision quality. From the above, IntraLase Lasik costs 30% more than standard Lasik on average.

    2. Wavefront is an advanced measurement system that creates a 3-D map of how your eye processes images to guide the laser in reshaping the cornea. This allows the treatment of potential problems like glare, shadows and halos, that standard Lasik cannot. From the above, Wavefront Lasik costs up to 50% more than standard LASIK.

    3. Epi-Lasik is a modification of
    PRK, where a blunt seperator is used to make a superficial flap. This method may be recommended to some patients but the disadvantages are there is more pain, higher chances of haze and scarring, and recovery is slower.
    Appendix III: Average costs per eye in the US.
     
     
     
    Appendix IV: Rising procedure costs in the US
     



















    Source: Marketscope, part of
    LCAV July 29 Analyst Presentation

     
    Appendix V: Myopia rates in Asia.


    Appendix VI: Population Age Distribution
    Aug 28 12:23 PM | Link | Comment!
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