Thomson Medical Group announces new 5Y SGD senior unsecured notes at IPG of 5.00%

Thomson Medical Group Limited (“Thomson Medical”) intends to issue a new 5-year SGD senior unsecured notes at the initial price guidance (“IPG”) of 5.00%. The new bond is expected to be issued on 29 October 2024, with a maturity date of 29 October 2029. Thomson Medical indicated that the net proceeds will be used for the refinancing of existing borrowings and the general working capital of the group. The issuer is unrated, while the new issuance is expected to be unrated as well.

We wish to note that the new issuance is made available only for accredited investors and institutional investors.

Thomson Medical is a regional healthcare player in Southeast Asia, with operations located in Singapore, Malaysia and most recently, Vietnam. In 2023, Thomson Medical organised a high-profile acquisition of FV Hospital in Vietnam, the first Joint Commission International (“JCI”) accredited hospital in South Vietnam. The transaction was reportedly the largest acquisition in Southeast Asia since 2020 valued at approximately SGD 517m.

For the year ended 30 June 2023 (“FY23”), we largely noted a deterioration in performance by Thomson Medical. Revenue dipped slightly by -1.3% year-on-year (“YoY”) from SGD 355.8m (FY22) to SGD 351.2m (FY23). Despite recording an additional half-year contribution from the acquired FV Hospital, revenue declined owing to the completion of COVID-19-related projects in Singapore. The projects – providing medical services primarily relating to the COVID-19 pandemic – had been a significant boost to Thomson Medical’s income over the past few years. The management has previously mentioned that most COVID-19-related projects were completed in the earlier half of 2024.

Meanwhile, profits fell rather significantly by -52.5% YoY from SGD 41.1m (FY22) to SGD 19.5m (FY23) due to an increase in overall expenses. Most of the operating expenses increased after the acquisition of FV Hospital in Vietnam, offsetting the higher revenue. Most notably, net finance costs jumped +66% YoY from SGD 26.6m (FY22) to SGD 44.2m (FY23), a result of the substantial debt undertaken for the acquisition of FV Hospital.

With that said, we wish to highlight that Thomson Medical continues to report a considerably stable operating cashflow – just a slight drop from SGD 88.6m (FY22) to SGD 83.4m (FY23). This had been contributed by a working capital inflow (versus an outflow in FY22) while a fair amount of the increased costs were higher depreciation and amortisation of assets, which are non-cash in nature. In addition, we note that Thomson continues to report positive operating cashflow before the changes in working capital, as with its past results. 

We primarily expect Thomson Medical’s earnings outlook to remain stable from here, with the revenue decline in Singapore to be offset by growth observed in Malaysia and Vietnam. Meanwhile, costs are likely to decline for Thomson Medical, particularly with finance costs to fall upon lower interest rates.

Among Thomson Medical’s assets, it holds onto 9.2 hectares of freehold land in Johor Bahru’s city centre, reserved for the intended development of VantageBay HealthCare City. This freehold land saw a reversal of impairment of SGD 25.5m in FY23 and continues to hold a cumulative impairment of SGD 78m (since 2020, owing to the COVID-19 pandemic and changes in regulations). We expect this development to be credit positive for Thomson Medical, given that the freehold land is likely to see significant fair value gains. This is because of (1) the setting up of a Special Economic Zone in Johor Bahru, between Singapore and Malaysia and (2) the upcoming completion of the Rapid Transit System across the Straits of Johor, with the land near Johor Bahru’s terminal. Valuation gains will be beneficial for bondholders as this would allow Thomson Medical to seek refinancing with greater ease, while providing an additional avenue for raising cash if necessary.

Thomson Medical’s credit profile had worsened across the year, although this was already anticipated with the FV Hospital acquisition. Primarily, the total debt rose from SGD 747.8m (FY22) to SGD 1,106.2m (FY23) – which resulted in debt metrics deteriorating (net debt to equity ratio increased from 0.8x to 1.6x, net debt to EBITDA increased from 4.5x to 9.2x across the same period).

We believe Thomson Medical is likely to benefit from falling interest rates given their proportion of floating rate debt at ~57%. It previously reflected an interest rate sensitivity (as of FY23) of an additional SGD 6.3m profit before taxes, should interest rates fall by 100 basis points. Meanwhile, we do not see any concerns for their upcoming debt maturity at the moment – as Thomson Medical primarily relies on secured borrowings for their bank loans.

For our recent coverage on Thomson Medical’s FY23 performance, do refer to the article here - Idea of the Week: Thomson Medical Group sees value to be unlocked

Table 1: Thomson Medical issuances

With the maturity of TMGSP 4.050% 28Jan2025 Corp (SGD) on the horizon, we expect the upcoming new issuance to be primarily used for refinancing of the maturing bond with about SGD 175m in total issuance size. The IPG of the new issuance is attractive compared to Thomson Medical’s outstanding issuances maturing in 2027 and 2028 – both of which offer yields of between 4.3% to 4.4%.

While we expect the final price guidance to be adjusted downwards, we believe the new issuance should remain attractive over other Thomson Medical papers. The yield is likely to be more than adequate to compensate investors for the additional duration risk to undertake for the new issue. It would be a suitable option for investors looking for higher-yielding papers from a stable issuer across the SGD bond space.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in TMGSP 5.500% 31May2028 Corp (SGD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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