Thomson Medical announces SGD 5NC1 senior unsecured bonds at 5.75% IPG

Thomson Medical Group Limited (“Thomson Medical”) announced that the company is planning to issue a 5-year senior unsecured note with a call option after the first year, at the initial price guidance (“IPG”) of 5.75%. If the issuer chooses to exercise the call option, the issuer is liable to pay half a coupon in addition to the par value. The issuer is unrated and the bond is expected to be unrated as well. The issuance is expected to be issued on 31 May 2023, with a maturity date on 31 May 2028 and a call date on 31 May 2024.

Thomson Medical indicated that the proceeds will be used for general corporate purposes, which include refinancing of borrowings, financing potential acquisitions, strategic expansions, general working capital, capex expenditure and other possible investments of the group.

Thomson Medical is an integrated healthcare solutions provider in Singapore and Malaysia, established through the brands Thomson Medical Pte. Ltd., TMC Life Sciences Berhad, and also Vantage Bay Healthcare City. Thomson Medical operates a total of 39 clinics and centres across Singapore, while in Malaysia, it operates the flagship Thomson Hospital Kota Damansara in addition to 8 clinics and other centres. The company is listed on the Singapore Exchange with the ticker A50. Thomson Medical is currently identifying growth plans in Indonesia and Vietnam – which might lower the overall profit margin despite the diversification of business risk.

For the half year ended 31 December 2022 (“2H22”), Thomson Medical saw a 27% rise in group revenue from SGD 145.5m in 2H21 to SGD 184.0m in 2H22, while the group EBITDA rose by 41% from SGD 39.4m in 2H21 to SGD 55.5m in 2H22. The strong results were largely attributable to increased patient load, higher intensity of cases and ongoing public-private projects in Singapore. The net profit after tax rose 74% from SGD 14.0m in 2H21 to SGD 24.3m in 2H22. The easing of COVID-19 restrictions is expected to continue supporting the demand for healthcare services in 2023, particularly for elective procedures that have been deferred during the COVID-19 period. Things are looking quite optimistic for Thomson Medical, especially after seeing record profits in its fiscal year for 2022, attaining more than just a recovery from the impact of COVID-19. The results affirm the development path Thomson Medical has been on, and we believe likely to provide for continued stability post-COVID-19.

Thomson Medical tends to hold a prudent cash position over the past years of operations, with its cash and short-term deposits sitting at a comfortable SGD 153.5m as of 31 December 2022 – more than sufficient in covering its current liabilities at SGD 120.5m. Since 2020, Thomson Medical has been reducing its net debt-to-equity ratio, reflecting a careful approach towards taking on further debts. Its current net debt-to-equity is estimated at about 0.81 times, although it is expected to increase with the new issuance of debt. During its presentation, it indicated that it would strive to continue reducing its net debt-to-equity ratios.

On the new issuance, the structure is unique given a call option after the first year, which provides for an additional half coupon on redemption. Given the structure, Thomson Medical is likely considering the possibility of refinancing the note with a cheaper one if interest rates do fall by then. As such, the current consideration for the issuance is that the likelihood of a call after the first year is quite high, given the ongoing expectations for interest rates to fall in 2024. In the event of a call after the first year, the yield to call inclusive of the additional half coupon is about 8.62% - as compared to the yield on 1-year T-bills at 3.62% as of 24 May 2023.

Table 1
SGD Corporate issuances of about 1-year maturity term

Compared to other SGD issuances with about 1 year maturity, with the assumption of a call after the first year, Thomson Medical’s new issuance stands out with a comparable yield of 8.62% while its credit profile is stronger against that of OHLSP and ASPSP.

However, the above scenario is based on the sole assumption that the issuance gets redeemed on the call date. The 5-year maturity term has to be considered as well.

Table 2
SGD Corporate issuances of about 5-year maturity term

Against other SGD issuances of about 5 years maturity term, the 5.75% coupon on the new issuance by Thomson Medical is quite attractive. On this note, we would like to remind investors that the final price guidance is likely to come lower than the initial price guidance.

While Thomson Medical’s new issuance might seem attractive across the 1-year and 5-year maturities, the yield pick-up is compensation for the uncertainty over the possibility of a call.

In an ideal scenario, it would be recommended to investors who can accept both outcomes – a call and continuation to 5-year maturity. As such, we would like to highlight the reinvestment risk associated with this new issuance due to the call option. Assuming interest rates had fallen which incentivises the issuer to refinance and exercise the call option, investors might have difficulty finding options with similar yield and credit ratings.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in OHLSP 6.900% 08Jul2024 Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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