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- Profits fell for Thomson Medical Group owing to the completion of COVID-19-related projects in Singapore and higher overall costs due to the newly acquired hospital.
- We expect the Special Economic Zone development between Singapore and Malaysia, and the Rapid Transit System to benefit the Group’s freehold land in Johor Bahru.
- Thomson Medical SGD issuances continue to show attractive yields at over 4%.
Thomson Medical Group
Thomson Medical Group Limited (“Thomson Medical”) is a regional healthcare player in Southeast Asia, with its entry into Vietnam late last year. An established healthcare services provider in Singapore, Thomson Medical placed its emphasis on widening its outreach overseas – starting with Malaysia, and now expanding into Vietnam.
In Singapore, Thomson Medical is known for its Thomson brand of healthcare services, primarily serving a range of services for women and children. In Malaysia, it operates the Thomson Hospital Kota Damansara in Kuala Lumpur through its majority-owned subsidiary TMC Life Sciences, with the development of VantageBay Healthcare City – an integrated health and wellness development located in Johor Bahru’s city centre – still in the plans. Lastly, it acquired FV Hospital in Vietnam in December 2023, a multi-disciplinary tertiary hospital and the first Joint Commission International (“JCI”) accredited hospital in South Vietnam.
Financial Highlights
For the twelve months ended 30 June 2024 (“FY23”), Thomson Medical recorded a largely flat revenue (-1.3% year-on-year (“YoY”)) while profits fell by -52.5% YoY. Despite recording an additional half-year contribution from the acquired FV Hospital in Vietnam, revenue fell marginally from SGD 355.8m in FY22 to SGD 351.2m in FY23. This was primarily due to completing COVID-19 related projects in Singapore – an avenue that greatly boosted Thomson Medical’s income over the previous years.
This impact is clearer when comparing the revenue contribution of individual countries. The revenue from Singapore’s business (Chart 1) started falling in FY23, which the management mentioned during an earlier investor call that most COVID-19 related projects have been completed. We largely expect the revenue from Singapore to continue falling because of this in the following full-year period, although the impact is likely to be partially offset by increasing average bill sizes in Singapore.
Chart 1: Revenue contribution by country for Thomson Medical
Additionally, overall expenses have increased for Thomson Medical, owing to the recognition of FV Hospital within its financial statements. The Group’s net finance costs increased by a substantial +66%, from SGD 26.6m (FY22) to SGD 44.2m (FY23) due to the interest expenses on the borrowings for the FV Hospital acquisition. Furthermore, we noted that Thomson Medical recorded a reversal of impairment associated with the VantageBay Healthcare City for a total of SGD 25.5m – allowing the Group to record an overall profit of SGD 19.5m for the year.
With that said, Thomson Medical’s operating cashflow was not significantly impacted by the fall-off in revenue and increase in costs, seeing just a slight drop from SGD 88.6m (FY22) to SGD 83.4m (FY23). This had been contributed by a working capital inflow in FY23 (+SGD 12.0m) as compared to an outflow in FY22 (-SGD 5.5m). We note that a fair amount of the increased costs had been contributed by higher depreciation and amortisation of assets (SGD 21.1m in FY22 vs SGD 27.5m in FY23), which are non-cash in nature. Lastly, Thomson Medical’s net cashflow had been negative for FY23, but the outflow was used for acquiring FV Hospital as previously indicated in its acquisition plan (a combination of its existing cash and additional debt).
Thomson Medical’s outlook
We have reasons to expect the Group’s earnings would remain stable over the upcoming period, especially on the backdrop of interest rate cuts. While revenue growth is likely limited (revenue decline in Singapore likely to be offset by growth in Malaysia, excluding the full-year recognition of revenue from Vietnam), we largely anticipate costs to decline. Other operating expenses are likely to lower with the completion of FV Hospital acquisitions, while finance costs would decrease with falling interest rates. Additionally, further reversal of impairments on the VantageBay Healthcare City would boost Thomson Medical’s overall profit, albeit the reversal is non-cash in nature.
The exciting part about Thomson Medical is the potential value of the 9.2 hectares allocated for the VantageBay Healthcare City, which has previously recorded impairments in asset value mainly due to the COVID-19 pandemic. As of FY23, the property sees a cumulative impairment of SGD 78.0m, accumulated since FY21 and this is after the SGD 25.5m reversal of impairment observed for FY23. Despite the impairment, Thomson Medical still sees rather significant value associated with the freehold land reserved for the development in Johor Bahru with an aggregate amount of SGD 279.7m (property and equipment at SGD 79.7m, investment property at SGD 102.6m and development property at SGD 97.4m).
While the current value already seems substantial in contrast to the Group’s total assets of SGD 1.8b, the potential value of the land is likely Thomson Medical’s key focus of development in the short to medium term. There are two contributing factors to a potential jump in the land’s value – 1) the setting up of a Special Economic Zone (“SEZ”) between Singapore and Malaysia in Johor Bahru, with the land in the centre of the SEZ and 2) the ongoing development of the Rapid Transit System between Singapore and Johor Bahru, with the land near the Johor Bahru’s terminal.
The potential value of the land remains uncertain as the final agreement for the SEZ is still up for discussion, but we strongly believe Thomson Medical would see fair value gains for this freehold land. This development would be crucial for bondholders as it is likely to substantially increase Thomson Medical’s overall assets. Given that Thomson Medical relies on secured borrowings, an increase in asset value would enable Thomson Medical to conduct refinancing with greater ease – lowering the default risk of existing issuances.
Additionally, it provides an avenue for Thomson Medical to raise cash should it deem suitable to do so. Previously, the management had indicated that it is not expecting to utilise the full parcel of land, with excess land potentially becoming a source of cash depending on the prices.
Credit Highlights
Thomson Medical’s credit profile worsened considerably, although this worsening had already been expected owing to the additional debt undertaken for the acquisition. We see a rise in total debt from SGD 747.8m as of June 2023 to SGD 1,106.2m as of June 2024. Consequently, most of Thomson Medical’s debt metrics deteriorated – its gearing (net debt to equity) ratio increased from 0.8x (June 2023) to 1.6x (June 2024), while net debt to EBITDA increased from 4.5x to 9.2x across the same period.
Given Thomson Medical’s floating rate debt accounts for ~57% of its total debt, falling interest rates would likely help reduce overall interest expenses. As of June 2024, it reflected an interest rate sensitivity of an additional SGD 6.3m profit before taxes if interest rates had been 100 basis points lower. As such, we have expectations of the Group improving its interest coverage ratio from here, albeit net debt to EBITDA is likely to stagnate with profits insufficient to meaningfully pare down debts.
Looking at Thomson Medical’s liquidity, we saw a drop in the Group’s cash position – falling from SGD 286.6m as of June 2023 to SGD 167.3 as of June 2024. The drop was a result of the cash being used for acquiring FV Hospital (previously raised with the bond issuance of SGD 175m TMGSP 5.500% 31May2028 Corp (SGD)), in addition to the debts that Thomson Medical was planning to undertake. However, we would like to highlight that its current cash position falls closer in line with prior cash levels (SGD 122.7m in FY21 and SGD 161.6m in FY22).
With SGD 189m borrowings set to mature within one year, Thomson Medical’s current liquidity should adequately cover the repayment. On the other hand, we believe the Group would likely seek refinancing on the current borrowings to maintain its cash position. Refinancing is unlikely to be an issue for Thomson Medical in general, given its reliance on secured borrowings with all bank borrowings being secured. Thomson Medical did not explicitly state the value of assets used towards pledging for the borrowings, but it has sizeable total assets of SGD 1.8b in comparison to its secured bank loans of SGD 628m.
Table 1: Thomson Medical credit and debt metrics
SGD m | As of Jun-22 | As of Jun-23 | As of Jun-24 |
Total debt | 629.1 | 747.9 | 1,106.2 |
Cash | 161.6 | 286.6 | 167.3 |
Net debt | 467.5 | 461.2 | 947.5 |
EBITDA | 109.7 | 103.3 | 113.5 |
Net gearing ratio (net-debt-to-equity) | 0.8x | 0.8x | 1.6x |
Net-debt-to-EBITDA ratio | 4.3x | 4.5x | 9.2x |
Sources: Thomson Medical Group FY23 results presentation. | |||
Recommendations
Table 2: Thomson Medical issuances
Issuances | Ask Price | Yield to Maturity | Years to Maturity |
100.06 | 3.82% | 0.30 | |
102.55 | 4.20% | 2.59 | |
104.05 | 4.28% | 3.64 | |
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 9 October 2024. | |||
Among the SGD bond space, the 2027 and 2028 Thomson Medical papers continue to trade relatively attractively with over 4% yields. Meanwhile, as the TMGSP 4.050% paper matures in about 4 months, the Singapore T-bills would be a better consideration for investors looking at such short duration.
Between the Thomson Medical 2027 and 2028 papers, we prefer the 2027 paper given the earlier repayment over the 2028 paper – with largely similar yields. While Thomson Medical likely sees significant value to be unlocked from the Johor Bahru freehold land, the overall business operations and credit profile remain relatively risky for the time being. As such, a slightly shorter duration on the 2027 paper would help to limit the overall risk exposure for investors, with further developments for the VantageBay Healthcare City likely allowing credit spreads to improve in the future.
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