Idea of the Week: Healthcare provider with decent yield

On the other hand, Thomson exhibits a lower bed occupancy rate (BOR) compared to its two counterparts. As of 31 December 2023, Thomson’s BOR stood at approximately 61%, while KPJ and Sunway boast BOR of 67% and 74% respectively. Despite lagging behind its peers in terms of BOR, it is still reassuring that Thomson has consistently maintained its BOR within this range over the past few years.

Table 2: Number of licensed beds and occupancy rate

Expect higher DE ratio after Vietnam acquisition, but see no immediate worry

Shifting focus to the credit profile, Thomson exhibits higher DE and net DE at 1.3 times and 0.8 times respectively. This isn’t the case for the two peers, in particular Sunway Healthcare. Nonetheless, with the minimal short-term borrowings of SGD 12 million, coupled with the cash and short-term deposits of SGD287 million, this provides more than sufficient coverage.

Table 3: Selected credit metrics (in times, except for deposits, bank and bank balances that are denominated in MYR/SGD million)

Following the acquisition in Vietnam, we foresee a drastic increase in pro-forma net DE to around 1.7 times. On one hand, we see no immediate worry for Thomson given the prudent cash position that could be used to fulfill some repayments if needed. On the other hand, it will take a couple of years before Thomson sees its credit profile improving back to levels before the acquisition.

Thomson Medical Group’s outlook

On one hand, Thomson had been clear in its development pathway. It seeks to expand and establish itself beyond the Singapore market, which we saw the opening of a new expansion wing at THKD and following up, the upcoming development in Iskandar. Now, we see aggressive expansion into the Vietnam market, with Thomson’s reason being this allows them to tap into Vietnam’s growing private healthcare market. From 2017 to 2022, Vietnam saw healthcare expenditure growth at 9.2% CAGR.

Thomson appears to be mostly heading in the right direction. This is corroborated by the relatively stable growth in revenue and the growing free cash flow.

However, any growth plans have its challenges. Across FY23, higher costs have taken a toll on Thomson’s performance. While attributable to the new expansion wing at THKD, higher operational costs and finance costs ate into the additional profits that the expansion could have brought about.

Therefore, while we are mostly positive about Thomson’s development plan in the near term, given the acquisition in Vietnam and continued development in Malaysia, its outlook will be limited by how prudent Thomson would be in managing costs. Top-line is expected to improve given increased contributions from the Vietnam hospital, but the bottom-line in the immediate term is expected to be heavily impacted by fees related to the acquisition in addition to the higher financing costs.

Non-discretionary nature of healthcare

The healthcare industry is widely regarded as recession-resistant due to its relatively stable demand regardless of economic conditions. This stability stems from the consistent need for healthcare services, which remains relatively unaffected by economic downturns. Additionally, the ageing population will also increase the demand for private healthcare in the coming years.

Risk

One of the risks healthcare providers might face is legal challenge, in particular malpractice lawsuits which can lead to reputational damage and penalties.

Other than that, the healthcare industry is highly competitive. Private healthcare providers not only have to fend off against other private peers, but also public sector hospitals for its own share of the medical services market. For instance, the MoH of Singapore provides targeted subsidies for acute inpatient care at public hospitals, based on household income per capita.

Unlikely to exercise the call option in TMGSP 5.500% 31May2028 Corp (SGD)

The TMGSP 5.500% 31May2028 Corp (SGD) paper is callable in May 2024 at SGD102.75 of the principal amount, which is the end of this month. However, we believe it will not be redeemed earlier, given the higher-for-longer outlook for interest rates alongside the deterioration of the credit profile post-acquisition.

Thomson Medical Group is unrated

Thomson has not obtained a credit rating from any rating agency, rendering it unrated. In contrast, KPJ Healthcare holds a rating of AA- by MARC while Sunway Healthcare is rated AA from the same agency.

Recommendation

Given the weaker credit profile of Thomson against peers like KPJ and Sunway, investors may reasonably expect higher yields from Thomson’s bonds, on top of the compensation for the higher SIBOR rate in Singapore (Equivalent of OPR in Malaysia).

Currently, we are seeing more than 100 basis points pick-up in Thomson’s SGD bonds compared to Point Zone (funding vehicle of KPJ) and Sunway Healthcare MYR bonds. This we believe adequately compensate for Thomson’s comparatively weaker credit profile while offering investors the opportunity to buy a corporate bond which the issuer’s business itself is recession-resistant in nature.

All in all, we feel that this is a decent proposition for Malaysia bond investors who are interested in healthcare business. Among the Thomson SGD bond universe, for short duration we prefer the TMGSP 4.050% 28Jan2025 Corp (SGD) with yield of 4.2%. Alternatively, for investors who are seeking for slightly longer duration, we prefer the TMGSP 5.250% 13May2027 Corp (SGD) for its decent 5% yield with 3 years to maturity.

Table 4: Bond list