Doctors are one of the most revered occupations in our society. There are many parents who wished their children can become doctors. This is not surprising consider that it is noble saving the lives of others and receive a high pay at the same time.
Healthcare is a basic need and is growing in demand due to an aging population. People are also worried about a rising healthcare cost.
With these underlying trends and concerns, it is of no surprise that medical stocks are a favourite among investors.
But the reality has been baffling – medical stocks have taken a beating in recent years and the FTSE ST Health Care Index was down by 29% in the past five years!
I believe the healthcare stocks in Singapore are more attractively priced now than before.
The long term healthcare trend is still intact and this might be a good opportunity to pick some up – I will be focusing on TalkMed in this article.
TalkMed specialises in oncology (cancer treatment) and operates 9 clinics within Parkway Holdings’ hospitals such as Mount Elizabeth and Gleneagles. It was founded by Dr Ang Peng Tiam – he was one of the President’s Scholars in 1977 and chose to study medicine in National University of Singapore (NUS) instead of a foreign university. He eventually started the medical oncology department in Singapore General Hospital (SGH) and was the principal doctor to current Prime Minister Lee Hsien Loong in 1992, when the latter was treated for lymphoma.
TalkMed has other businesses such as stem cell and gene therapy. But they are nascent developments in the field of oncology and have yet to be widely adopted. Oncology services contributed 96% of Talkmed’s revenue in FY2019.
TalkMed’s profit margins have been been juicy all the while – earning upwards of 47% profit margins that many companies can only dream of.
|Financial Year||Profit Margin|
You can see that the biggest expense in the FY2019 income statement was employee benefits (which are doctors’ salaries) while the rest of the expenses were non-consequential – the second highest expense was income tax! IRAS said, “thank you for contribution towards nation building.”
This suggests that the market values oncology services highly, as the patients are willing to pay to receive treatment. It is not difficult to understand given that cancer is often a terminal disease and if one has the financial means to save his own life, most would do it. Hence, TalkMed is in a very lucrative niche in medicine.
The management has been generous in adopting a dividend policy of distributing 75 percent of the net profits as dividends each year.
In fact, the management has outdone their promise in the past 6 years, distributing more than 80 percent of the net profits as dividends in most years.
TalkMed is trading at a REIT-like dividend yield of 6.1% (based on 2019 dividends).
This is the highest yield it is trading at over the past 5 years, more than two standard deviations from the mean dividend yield of 4% – this suggests that TalkMed is pretty cheap.
TalkMed generates most of their revenue from the Singapore clinics even though they have clinics in Vietnam, Hong Kong and China.
This is misleading because TalkMed has patients from the region. Those who could afford the fees would travel to Singapore seek treatment due to our high medical know-how. TalkMed is dependent on medical tourism, which accounts for almost half of its revenue.
But borders are now closed to contain Covid-19 and medical tourism is dead for the time being. That’s definitely bad for TalkMed. There’s no firm dates of reopening too.
We can get some indication on the impact by looking at TalkMed’s half-year results:
It doesn’t look as bad as we think – the revenue and net profit for 1H2020 declined 14% and 36% compared to the same period a year ago. The management did not cut dividends, maintaining the same $0.01 dividend per share as per last year.
But Singapore only started closing her borders from 22 Mar 2020 onwards. This means that TalkMed was operating normally for the first 3 months and medical tourism was only affected in the subsequent three months of the reporting period.
Hence, it is only prudent to assume that the revenue would half for the second half of 2020 unless the travel restrictions get lifted before the year ends. It is also fair that the market punished TalkMed shares as much as a hospitality stock due to the uncertainty that looms over medical tourism.
While many companies may be struggling to stay afloat after Covid-19 has ravaged their businesses, there’s no such concern for TalkMed. This is because it has $80m of cash in its balance sheet as of 30 Jun 2020 and this is more than enough to pay for all expenses for at least 2 years without any revenue.
This is an asset-light business if not for the cash in the company (87% of the total assets are in cash!) Another thing to note is that this company doesn’t have goodwill in the balance sheet which is unusual for healthcare businesses.
Most healthcare businesses expand via acquisitions of other clinics. Their acquisition consideration is often higher than the book value of the business and hence, goodwill has been generated in the process. The downside is that the amortisation of this goodwill will happen in the future and depress the net earnings of the acquirer.
TalkMed doesn’t have this problem and the revenue growth is mainly achieved through organic growth – Dr Ang Peng Tiam has been able to attract doctors to join and serve patients under the TalkMed umbrella. The number of doctors has increased from 8 to 15 in the past 10 years.
Dr Ang Peng Tiam as a prominent doctor is not without its problem. There’s always a key person risk in such cases and indeed Dr Ang was suspended from medical practice in 2017 for 8 months after the court had found him guilty of painting an optimistic recovery to a patient and failing to provide surgery as an option.
Dr Ang’s 8-month suspension started from 25 July 2017 and he returned on 25 March 2018. Even though his clients were handled over to other doctors, TalkMed’s revenue inevitably was hit in 2017 and 2018.
Dr Ang Peng Tiam is 62 years old and he is near the retirement age. There isn’t an obvious successor at the moment. I believe he could be able to serve for another 10 years but who knows, he might retire earlier and we can expect some revenue impact as the star doctor leaves.
Dr Ang currently holds 65.34% of TalkMed shares. I always like the key man to have a significant stake in the company he runs because he assumes the biggest risks as well as receives the largest rewards – he wouldn’t want the company to do badly and he is also incentivised to earn more money.
He would tend to make shareholder friendly decisions because he is the largest shareholder in the company. I find that it is of no coincidence that the generous dividend policy stems from Dr Ang’s large stake in TalkMed. Just in 2019 alone, he would have received S$19.8m worth of dividends. He doesn’t need to pay personal taxes on these dividends because of the one-tier corporate tax system in Singapore.
There’s a downside to a huge ownership – there’s little supply of TalkMed shares as the large shareholders are unlikely to make them available for sale. It was estimated that 15.57% of the shares were held by public. This float is small and explains the lack of liquidity in the market. It is hard for anyone to buy or sell TalkMed shares in large quantities.
We can also see from the previous revenue chart that TalkMed was back on track on its growth trajectory in FY2019, raking in the highest revenue of $76m in the past 10 years. The compounded annual growth rate (CAGR) of its revenue was about 5%.
It’s not the fastest growing company but has a reasonable growth prospect, considering that it is a high-touch business that is not easy to scale (doctors can only see a limited number of patients in a day).
In terms of cancer trends, Singapore is seeing increasing number of cases in women while the incidence rate for male has remained constant since 1968. The average annual growth rate of cancer incidence in Singapore was about 4%. Hence, there’s an underlying driver for TalkMed’s revenue growth.
In summary, TalkMed’s revenue growth would come from a combination of factors:
We previously noted that the dividend yield of 6% is TalkMed’s all time high. Such high dividend yield is rare among healthcare stocks. You probably only get such figures from REITs. Of course we can expect the yield to be lower in 2020 due to the lack of medical tourism sales for TalkMed.
TalkMed’s ROE and ROA metrics are fantastic at 43% and 33% respectively. PE ratio of 14 (trailing PE at 16) is considered low for healthcare stocks as they usually trade in the 20x range.
TalkMed is also trading at a PE that is 1 standard deviation below its mean PE ratio of 21. This is close to its lowest PE in the last 5 years.
TalkMed’s share price of $0.38 is also close to its 5-year low of $0.35.
You can own a portion of a clinic even if you are not a doctor.
TalkMed (SGX:5G3) is a highly profitable oncology business that is helmed by a star doctor in Singapore (Dr Ang). The rise in cancer incidence rates and the hiring of more doctors can continue to fuel the growth in TalkMed.
But it is not without problems – borders remain closed at the moment and TalkMed is impacted substantially considering that half the revenue comes from medical tourists. Dr Ang is nearing retirement age and his departure may result in the loss of clients and doctors, thereby affecting TalkMed’s business in the long run. That said, he doesn’t seem like going anywhere soon and TalkMed is trading at very attractive valuations – close to the lowest PE and highest dividend yield in the past 5 years.
Disclosure: I have a long position on TalkMed.