Singapore O&G Ltd (Questions about this healthcare services provider)

I previously did a post on Singapore O&G and TalkMed. I ended that post with a preference for Singapore O&G.

Nevertheless, I feel that since both firms are only recently listed on the Singapore Stock Market, and given their relatively short financial history (made available to the public), it would be hard for anyone to make a good guess on their future performance.

In addition, the operation of the company is highly reliant on medical practitioners (healthcare service providers) – which I feel is more unpredictable as compared to a company supplying healthcare products. Then again there are very successful listed healthcare service provider companies such as Raffles Medical Group. So I stand to be corrected.

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Recently, I have been reading up on articles about Singapore O&G (SOG). I re-read their SOG 2016 Annual Report, online articles on SOG and posts about SOG in the Value Buddies forum.

I always find the posts in Value Buddies interesting – there are always views from a different perspective. The posts in Value Buddies about SOG are pretty outdated (most are dated around 2015 – around the period during SOG’s IPO). Still, I always find the posts in Value Buddies in some way relevant and thought provocating.

SOG Annual Report was well done. FYI SOG won the Best Annual Report Award (Merit) under the First Year Listed Company category awarded by the Singapore Corporate Award 2016. (see page 18 of the 2016 Annual Report)

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High Dividend Payout

I am sure this would probably be on most investors’ minds. In fact, I think many of the investors who subscribed for its IPO back then was attracted to SOG’s aim to pay out 90% of its net profit.

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As stated in SOG 2016 Annual Report: “While SOG does not have a formal dividend policy, the Company targets to pay up to 90% of its net profit after tax for each financial year.”

This 90% payout was again raised during the recent AGM by one of the shareholders: “Mr. Chong Kok Weng further enquired on the dividend payout as stated on page 14 of the Annual Report and whether the Group will continue to pay up to 90% of its profits. Dr. Ng clarified that the current dividend payout policy is an ‘unofficial’ policy approved and adopted by the Board of Directors.

From an investor point of view, I find this 90% payout both at the same time odd and tantalizing. By the way, just for your information, I am not vested in SOG stocks.

Why odd? Well, one must first understand why a company wants to be listed. There are many reasons why a company wants to be listed, but the overarching reason as stated in this online article is to raise money: “The main reason companies decide to go public, however, is to raise money – a lot of money – and spread the risk of ownership among a large group of shareholders. Spreading the risk of ownership is especially important when a company grows, with the original shareholders wanting to cash in some of their profits while still retaining a percentage of the company.”

This capital raised can then be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage for listing is an increased public awareness of the company because IPOs often generate publicity by making their services or products known to a new group of potential customers.

So why raise money only to pay out most of the profits to passive shareholders (not that they are complaining)?

This is not a REIT, whereby the dividend policy states that it must pay out at least 90% of net income after tax. I like to think that SOG is a growing company (at least that is what I have gathered from what I have read from the Annual Report – see below). In fact, I did invest in a number of newly listed companies back in the past (and am still holding on to their stocks) ….eg. ISOTeam, Riverstone… and typically they do not pay out most of their earnings. Understandably, they need capital for their expansion.

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This question was also raised in this article by The Motley Fool, dated 28 May 2015: “In Singapore O&G’s case, the fact that it has chosen to not retain most of its earnings to fund future growth and yet has earmarked the bulk of its IPO-proceeds for just that purpose (to fund future growth, that is) does raise some questions about management’s capital allocation chops and the rationale for the IPO.”

I can’t find an answer for the above… but I do suspect this 90% pay-out is unsustainable. There are a number of reasons why I think so. One being the depletion of the IPO proceeds (see extract from the 2016 Annual Report – page 130).

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Basically, SOG has already utilised 100% of the IPO proceeds set aside for investment in healthcare professionals and synergistic businesses.

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Refer to page 166 of SOG 2016 Annual Report:

The total purchase consideration on for the acquisition of JL Group is S$28,294,630 and the breakdown is as follows:

  1. S$15,217,480 in shares
  2. S$14.0 million in cash payable in three tranches:
(a) First tranche of S$6.0 million paid on 1 January 2016,
(b) Second tranche of S$4.0 million (fair value of S$3,540,558 as at acquisition on date) due on1 January 2017, and
(c) Third tranche of S$4.0 million (fair value of S$3,536,592 as at acquisition on date) due on
1 January 2018.

As the 2016 Annual Report Financial Statements is for the financial year ended 31 Dec 2016… item 2(b) was not captured. After utilising S$6.401 mil, they still need to utilise S$7.6 mil cash ($8 mil minus dividend payout to Dr. Joyce) to pay for the acquisition of JL Group. By now SOG ought to have paid S$4 mil (out of this S$8 mil) in the second tranche. Now, where will the money come from?

Refer to page 177 of 2016 Annual report: “Subsequent to the end of the reporting date, the Company paid the second tranche purchase consideration, S$3.8 million in cash (S$4.0 million less final dividend received by Dr. Joyce Lim of S$0.2 million for the Acquisition of JL Group)”.

In addition, SOG did not manage to achieve 90% payout in FY 2016.

Refer to Page 128 of the 2016 Annual Report: “In FY 2016, the Company had paid dividends of 83.9% of the Company’s net profit after tax to the shareholders” 

It could be a short-term tactic meant for the IPO listing. To many, the most attractive feature of the new listing is its dividend policy.

Why list company?

Reading the posts in Value Buddies, this is also another question discussed quite frequently. When thinking about this topic, the spotlight inevitably falls on the 3 main stakeholders (Dr. Lee Keen Whye, Dr. Heng Tung Lan, and Dr. Beh Suan Tiong) at the time of the IPO.

After all, the success of SOG business is highly dependent on the commitment of their Specialist Medical Practitioners.

What if a Rainmaker leaves?

The idea that this listing is basically an Exit Strategy by these 3 doctors to cash out was bounced around in the forum. This is quite possible.

I always felt that running a successful practice alone is a double edge sword. On one hand, you reap what you sow. As the (only) founder, you get to keep most of the profits because of your own hard work… but once you retire, the company cease to exist. It dies with you – and the people who work for you would have to look for work elsewhere (or become jobless). The income stops (not that it matters if you are already rich)… but what if you can still maintain some income, part of legacy lives on while your staffs continue to have the same jobs?

The age of these 3 doctors then come into question: “Are their most productive years again behind or the best is yet to be? Are the older doctor-owners preparing a legacy for their offsprings with this IPO as the main motivation?”

As well, as their financial status and success (after all as stated by one person in the forum, Dr Heng is already very successful – famous in the East side of Singapore, and rich). She might be doing this beyond monetary reward eg. higher level of achievement – creating a legacy.

  • Dr. Lee Keen Whye: Age: 62. Total Calculated Compensation for 2016: $500,318. (read here)
  •  Dr. Heng Tung Lan: Age: 59. Total Calculated Compensation for 2016: $1,201,838.  (read here)
  • Dr. Beh Suan Tiong: Age: 53. Total Calculated Compensation for 2016: $514,570.  (read here)

Now, back to my previous post, there are pros and cons on depending on a few star doctors. But one major fear by many investors is that the founder stakeholder decides to cash out (and leave the organization) leaving shareholders holding the basket. The issue of he/she bringing the long time patients with them may not be that plausible due to the non-competition clause in the contract, but this clause seems only to apply to the 3 executive directors (see below extract from 2016 Annual Report).

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Also, even with the enforcement of the non-competition clause, there will nevertheless be a substantial drop in the earnings once one of the major revenue generating doctors leave.

Currently, there are 5 major shareholders in this company: All doctors operating within SOG. Dr. Joyce Lim joined the group due to the acquisition of JL Group in 2016.

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I am unable to find Dr. Joyce Lim Teng Ee’s age. But I reckon she is around mid-60s. Dr. Joyce Lim graduated from the Medical Faculty, the University of Malaya in 1978 (read here)

The contribution by the JL Group (eg. the Dermatology segment) for the group in terms of revenue & operational profit is very significant (around 30% in FY 2016). See below.

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FYI, SOG paid around S$28.2 mil to acquire JL Group. Of which S$26.1 mil is goodwill.

As stated on page 129 of the 2016 Annual Report, there appear to be term service agreements for the services of Dr. Joyce Lim and Dr. Choo:

“With the completion of the Sale and Purchase Agreement dated 31 December 2015, JLD shall provide the services through Dr. Joyce Lim Teng Ee to SOG DERM, to manage, carry on and maintain the business and medical practices for a term of eight (8) years (“Term”). Upon expiry of the Term, the services may be renewed for a further two (2) years on similar terms and conditions as may be agreed between SOG DERM and Dr. Joyce Lim Teng Ee.”

“The Company has entered into a service agreement with Dr. Choo Wan Ling, which deemed her employment to have commenced on 1 July 2013, and will continue for a term of five (5) years from the effective date of 1 January 2015 (“Term”). Upon the expiry of the Term, the employment may be renewed on such terms and conditions as
may be agreed between the Company and Dr. Choo Wan Ling.”

So assuming, just base on operational profit by JL Group to maintain at around $3 mil for 8 years – the total profit is only $24 mil. And that is not considering the total compensation allocated to Dr. Joyce. – after subtracting it, net income (from Dermatology) may be lower over the span of 8 years. Moreover, we are talking about operational profit, if we consider net profit, the final profit amount would be even lower.

The key is how much they can grow their Dermatology segment organically (to compensate for this ‘loss’)… and would the terms and conditions requested by Dr. Joyce and Dr. Choo be more expensive after their respective service agreements end. Dr. Joyce and Dr. Choo appear to be not bound by the non-competition clause as well. And that is assuming Dr. Joyce does not retire after 8 years… (which I think is likely).

A sudden withdrawal of the service of Dr. Joyce would be disastrous to SOG’s cash flow – if it did not improve much after 8 years.

Ok, this ‘loss’ is debatable as there should be value created due to synergy created among the various clinics and segments. Eg. the patients with skin problem can be referred from the clinics in the O&G segment to the clinics in the dermatology segment, and patients with cancer-related or pregnancy related issues can be referred to the clinics in the O&G and Cancer segment clinics — vice versa. The monetary increment (hard figures) from this synergy is hard to extrapolate.

No 90% dividend payout – how?

To go back to the earlier part of my post pertaining to dividend payout. I reckon shareholders would not complain if there is an increase in earnings (due to the acquisitions) but a reduction in payout percentage provided that the overall dividend yield is maintained or increased (despite a dilution in shares). The thing, yield is dependent on dividend payout and share price. I doubt SOG management can manipulate share price.

Actually, I don’t understand why investors should be enticed by a 90% dividend payout – technically if you ask me, an investor looking for good passive income should aim for low dividend payout and high dividend yield. It ensures that the company is sustainable financially while at the same time reward the shareholders.

So back to the case of the acquisition of JL Group on 1 January 2016. The calculations below show that the group could have reduced the dividend payout ratio, while maintaining the same dividend payout (yield might have dropped as stock price have increased between 2015 to 2016):

  • 20,401,501 shares issued to Dr. Joyce Lim in February 2016 (Share capital increased from 218,000,000 to 238,401,501 in FY 2016). Basically, increase no. of shares (dilution).
  • S$2.9 million operational profit from Dermatology segment in FY 2016 (due to JL Group). Profit after tax increased from S$5,341,325 to S$8,803,678 in FY 2016 (ok, the increase in profit is not just because of the JL Group acquisition – but well – just for simplicity sake we assume that … they attributed the bulk of it).
  1. Estimated EPS per share in FY 2015 = S$0.0245 eg. S$5,341,325/218,000,000  (Base on 90% payout, dividend per share = S$0.022)
  2. Estimated EPS per share in FY 2016 = S$0.0369 eg. S$8,803,678/238,401,501 (To achieve dividend per share of S$0.022, payout percentage just need to be 59.5%)

A noteworthy point is that the gearing for SOG has increased in FY 2016.

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So instead of lowering the payout ratio, SOG has opted to increase debt for pay for the acquisitions (which basically answer my earlier question on where the rest of the money needed for JL Group acquisition coming from).

In the short term, given the low-interest rate environment, it might be better to utilise debts to fund acquisitions. This would also avoid the unpleasant queries from the new minority shareholders. However, for the long term strategy (if interest rates do rise significantly) – the growth can be funded by earnings and share capital.

In the short term, the strategy to increase earnings while lowering payout ratio is a good one. I mention short term because the service agreements with the new doctors are not binding forever… (this reminds me of the nitro turbo charge to the car engines in the Fast n Furious movies…. fast but short). It gives the group a sudden boost in earnings (at least on paper) —- but the run-up might be short term if there is no subsequent injection of new blood organically.

And oh yeah, they do run the risk of having the occasional uncle raising his hand and asking during the annual AGM, to ask management to please raise dividend payout if yield did not increase (but decrease) over the long term. :p

Actually, in absolute terms, the shareholders get the same dividend payout, but when measured against the share price which has appreciated, the yield dropped (from 2015 to 2016)…. so sometimes, I wonder if some shareholders are aligned in growing the company. The fact is that SOG packaged itself as a growing company which at the same time, also announced such high dividend payout – to me is somewhat counterintuitive.

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Management Structure

The 5 major shareholders/doctors collectively own around 72.85% of the company. Dr. Heng (Executive Chairman) is the biggest shareholder of them all (at 29.44%).

Incidentally, her salary is also significantly higher than the others. A $1 mil salary for a company that has a $8.8 million net profit from a group of 10 doctors for FY 2016. And that is just the fixed salary – what about the tax-free dividend payout from her share holdings?

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Although Dr. Heng is the major shareholder, the percentage of her share in the company (at 29.44%) pales in comparison to her peers in Raffles Medical Group (Executive Chairman Dr. Loo Choon Yong‘s total interest is 51.34%) and TalkMed (Executive Director and Chief Executive Officer Dr. Ang Peng Tiam & his spouse’s total interest is 65.35%).

By the way, I can’t find the exact amount of RMG Dr. Loo and TalkMed Dr. Ang total remunerations – just that it is above $500k.

Also, the management structure of SOG is different as compared to TalkMed, in the sense that the CEO of SOG – Dr. Ng Koon Keng (he was formerly CEO of Asiamedic Limited) is not a medical director.. and his total interest in the company is only 1.35%.

It is hard to gauge the ability of Dr. Ng base on what I have read about his background:

  1. Chief Executive Officer of AsiaMedic Ltd. until September 7, 2010.
  2. In 2004, he started A-Vic Enterprises Pte. Ltd., a media company that produced a lifestyle magazine designed for the medical profession in Singapore.
  3. At the end of 2008, he placed the publication on hold when he accepted an offer to become Chief Executive Officer of Surgeons International Holdings Pte. Ltd. During this period, he also served as Medical Advisor to Red Carpet Medical, a premier medical tourism business of Red Carpet Edition Pte. Ltd., and as a director of the Orchard Surgery Center Pte. Ltd.
  4. He became a partner in a successful GP practice servicing the eastern part of Singapore in 1988.
  5. In 1997, Dr. Ng joined the financial industry and worked for two (2) leading institutions before returning to medicine in 1998.

He has experience in the financial sector, medical sector, media sector… worked as a GP, CEO, Medical advisor etc… Still, does he have a track record of being a CEO that brought success to a company? I did glance at AsiaMedic financial fundaments, it does not strike me as a fast growing company with a great balance sheet.

This may be more evident in the case of Singapore Medical Group, whereby the ‘poster-boy”, CEO Beng Teck Liang seems to be credited for turning the company’s fortune around (back in the black).

Nevertheless, it is good that the star doctors in this company (who are also the major revenue generators) have major stakes in the company. Their interest in that sense might align with the interest of the minority shareholders. If not for anything else, they get compensated as well for their contribution. Although no one really is a very ‘majority’ holder.

Also running a clinic is different from running a listed company. A star doctor with a successful practice does not automatically mean he/she will also be a good CEO.

I reckon the doctors would like the company to continue growing after they retire — and to continue to receive dividend income from their share holdings (or capital from sale from their shares). But they have to grow the company fast (esp. organically).

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In 2016, they have recruited two young Specialist Medical Practioners:
• Dr. Lim Siew Kuan (Age: 38)
• Dr. Hong Sze Ching (Age: 36)

Reaching beyond

In gist, for any investor, Singapore O&G is a long term play. The strategy laid out by the management take years to develop and come to fruition. I believe that SOG is going in the right direction, taking calculated risks and bringing synergy among related practices…. however, investors need to be really patient (and not just focus on the high dividend payout).

On a side note, I was watching the Berkshire Hathaway AGM video recently. At one point during the AGM, the question of succession and compensation to the successor taking over from Warren and Charlie was raised.

Warren mentioned philosophically about finding the individual who is already rich. Someone who is good at investing and passionate about it. His pay might never be able to compensate for the value of his service, but then again incremental increase in his net worth meant little to him (well – that is how I interpret it :p).  For instance, for that person $5 million, $10 million or $100 million is already more than he (and his family) will ever need… to ‘work’ for another $100 million isn’t that necessary. What motivates him isn’t financial rewards.

I guess for the mass majority of us who has not reached that level financially (well, no hard figures can define that — it really depends on your lifestyle and how much you need and want and what is the cash flow that can sustain it)…many of us would not be able to comprehend that. Like why Warren chooses to donate his shares to charity etc… Why work for less or nothing?…. But such individuals do exist and they do so for a higher calling.

If this is a Cashflow board game (the one by Robert T Kiyosaki), this person would have left the rat race a looooonnnnnggg time ago.

So why list a company you ask… why take the risk when they already had it all? Only the very few will comprehend. It is like asking Elon Musk – why set up Space X, Tesla, SolarCity, when he is already a billionaire. He could just ride off into the sunset with his wealth very early on.

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room flat.
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