StockPick

Updated : Added in figures for FY05 on 29-Aug-05

Background
A couple of weeks ago, I noticed several posts in CNA Forum on HMI. Forummers were complaining about this Healthcare stock which was at $0.05-$0.055 (now, $0.06-$0.065, likely due to interest triggered by optimistic posts in the forum) and kept going into the red, despite a rights issue in 2003. My interest was piqued as I also have special interest in Healthcare stocks, with holdings in Thomson Medical and Raffles Medical, and cannot understand why HMI should be making losses. Parkway, at the other extreme, is the best performing Healthcare stock.

I did some studies and contributed a few posts. My initial studies points to the fact that HMI is not like other penny stocks which I'd classify as "junk". HMI will post losses of aro' $5Mil due to write-off of assets in their loss making Health Education biz in S'pore for the recently concluded FY05 in Jun-05, but very likely, they'll start to post profits fm then on.

This study will help me decide on whether to add HMI to my portfolio and if so, at what price.

Financial Data
All the data in this case study are extracted fm the HMI 2004 Annual Report and 2005 mid yr results,

• Nam See Investment (Pte) Ltd (Direct 267,901 ; Deemed 130,020,000)
• Gan See Khem (Direct 172,500 ; Deemed 130,437,901)
• Chin Koy Nam (Direct 150,000 ; Deemed 130,460,401)
• Free Float 49.39%

Highlights (30-Jun-05 Announcements)

• Mahkota Medical Centre, a 228-bed hospital, has achieved a double-digit revenue year-on-year growth over the last three financial years from FY2002 to FY2004. In addition, the Company has also negotiated a contract to provide hospital management services to the Grand Hospital Bengkalis, a 150-bed hospital in Indonesia, which will commence operations in the fourth quarter of 2005.



• The healthcare education and training business has incurred a loss of S$1.5 million for FY2004. It is expected to sustain a loss of approximately S$1.5 million for FY2005. The Company having assessed the performance and the prevailing market conditions has decided to restructure the healthcare education and training division in order to stem further losses. In conjunction with this, the Company intends to make a one-time write-off of approximately S$5.6 million comprising mainly of non-cash items including fixed assets, revaluation reserves, and deferred expenditures, resulting in a net loss in the Company’s consolidated results for FY2005. Further details on the progress of the restructuring exercise will be announced when such plans are established.


My Comments : Impact of write-off on FY05 (End-June) Results
• Net Loss $4.5~$6Mil
• NAV drops below $0.05 (6.9ct minus $5.6Mil/286,686,600 shares = 1.953cts/share)
• Reduces subsequent Annual Depreciation Expenses by 1/3 or ~$1.2Mil

Highlights (Mid-Year 2005 : Dec-04)

• Revenue
  
  • Malaysian operations revenue grew by 21.2% to $18.92 million while the Singapore operations contributed $0.82 million to total revenue.
• Malaysia registered a profit after tax of $2.56 million. The losses in the Group's education operation in Singapore widened by 17% to S$0.78 million
• NAV - Mid Year '04 : 6.9cts ; Jun '04 : 7.3ct

My Comments - Profits continue to come from M'sia operations and losses from S'pore operations, resulting in net loss for the half.

Highlights (AR2004)

• Revenue
• Division
  • Hospital operations - 2004 : 32,487,528 ; 2003 : 31,245,057
  • Education - 2004 : 1,532,830 ; 2003 : 1,584,426
• Country
  • Malaysia - 2004 : 32,682,579 ; 2003 : 28,030,410
  • Singapore - 2004 : 1,337,779 ; 2003 : 4,799,073
  


• Asset Restructuring Exercise
  
  
  
  • MMCSB completed an asset restructuring exercise with the divestments of a major part of its properties to Genuine Foresight Sdn Bhd and its subsidiary companies. The restructuring exercise capitalized on the Malaysian government’s waiver of real property gains tax as well as to unlock and reflect the value of MMCSB’s assets.
    
    
  • Included in the Group’s trade receivables is an amount of approximately $46,336,000 (RM102,318,828) [2003 : $14,829,000 (RM32,138,090)] related to the disposal of some overseas leasehold properties and medical suites by MMCSB to GFSB group of companies in which certain shareholders of the Vendor have an interest. The profit on the disposal amounting to approximately $4,243,000 (RM9,390,102) [2003 : $9,100,000 (RM19,633,610] was included in other operating income. This transaction contributed to the Group recording a net profit of $758,420 and a positive net current asset position of $39,803,426. According to management, if the Purchaser is unable to pay the Consideration, this amount can be offset by the capital reduction of MMCSB as mentioned in Note 6(c).


• Subsidiary : Mahkota Medical Centre (30% +10% via M'sia subsidiary)


• In addition to its existing hospital management and technical consultancy contract, MMCSB had, in February 2004, secured a contract to provide medical equipment consultancy services to the Grand Hospital Bengkalis, Riau.
  
  
• Mahkota Medical Centre (MMC) in Malacca has initiated a multi-phase upgrading program to improve its facilities and services. A newly remodeled ward comprising 44 beds was completed and opened to patients in September 2004.
  
  
• As at 30 June 2004, the Group holds a total of 40% equity interest in MMCSB. Pursuant to an agreement signed by the shareholders of MMCSB on 21 September 2002, the Group exercises control over the Board of Directors and accordingly considers MMCSB as a subsidiary company. The existence of control can be demonstrated, inter alia, by representation on the Board of Directors, participation in policy making decisions and control over the management of MMCSB. MMCSB’s shareholders have approved the following capital reduction scheme:
  

(a) Increase of authorised share capital from RM50,000,000 to RM100,000,000 by way of the creation of 50,000,000new ordinary shares of RM1 each;

(b) Increase of issued and paid up share capital from RM30,000,000 to RM96,000,000 by way of a bonus issue of 66,000,000 new ordinary shares of RM1 each to be credited as fully paid up through capitalisation of M66,000,000 from revaluation surplus and retained profits and that such bonus shares shall rank pari passu in all respects with theexisting ordinary shares of MMCSB including but not limited to dividend and return of capital;

(c) Reduction of issued and paid up enlarged share capital from RM96,000,000 to RM4,800,000 by returning RM0.95 per share to the shareholders of MMCSB; and

(d) Consolidation of 96,000,000 ordinary shares of RM0.05 each to 4,800,000 ordinary shares of RM1 each.

The capital reduction exercise aims to maximise the value of MMCSB to its shareholders by separating the assets ownershipfrom the hospital operations of MMCSB.The capital reduction exercise will require the approval of the creditors of MMCSB and the High Court of Malaya. In the event that the capital reduction exercise is approved, the proceeds from the capital reduction will be returned to the shareholders of MMCSB. MMCSB’s shareholders can consider investing such proceeds in Genuine Foresight Sdn. Bhd. (“GFSB”) . The result of the capital reduction is that MMCSB will have a low paid-up capital and in the opinion of MMCSB’s directors, a better return on equity and capital employed.


• Rights Offering (December 2003)
  
  • ~$1.89 million for working capital after deducting expenses of $0.52 million and setting-off the shareholders' loans of $2.37 million.



• Property, Plant and Equipment
• NBV (30-Jun-04) = $16,669,296
• Depreciation for 2003 = $3,722,584

Comments

• GPM looks good at 30%
  
  • Profits from M'sia operations (MMC) - $2.56Mil after tax ; Double digit growth
  • Losses from S'pore operations (Education) ; Write-off in FY05 $5.6Mil
  • Net Losses due to High costs and Expenses + S'pore Education Biz


• Sale of assets in MMC
  
• Now in Trade Receivables ($46Mil)
  
  • Good for HMI to get cash as can reduce Bank Borrowings ($15Mil+) and thus Finance Cost ($1.5Mil~$1.8Mil)
• May be paid by buyer using cash fm Capital Reduction Exercise
• HMI gets small, regular Rental Income as shareholder


• Impact of write-off on FY05 (End-June) Results
  
  • Net Loss $4.5~$6Mil
  • NAV drops below $0.05 (6.9ct minus $5.6Mil/286,686,600 shares = 1.953cts/share)
  • Reduces subsequent Annual Depreciation Expenses by 1/3 or ~$1.2Mil


• Comparison with other Healthcare Stocks
  
• Thomson Medical (Mid-Yr 05) : 209,941,907 Shares @ $0.12 par
• NAV 25.05cts vs 18.5cts share price ; EPS 1.33cts ; PE 11.8 @ $0.175
• Revenue $19.04Mil ; GP $7.855Mil ; GPM 41.3% ; Net Profit $2.792Mil ; Cash $11.84Mil ; Borrowings $2Mil + $16.7Mil
• Raffles Medical (Mid-Yr 05) : 398,851,999 Shares @ $0.10 par
• NAV 25.01cts vs 50cts share price ; EPS 1.25cts ; PE 19 @ $0.48
• Revenue $52.9Mil ; Operating Profit $5.613Mil ; Net Profit $5.025Mil ; Cash $28.55Mil ; Borrowings $1.995Mil
• Parkway (Mid-Yr 05) : 725,711,212 @ $0.25 par
• NAV 52cts vs $2.10 share price ; EPS 4.04cts ; PE 28 @ $1.93
• Revenue $216.28Mil ; Net Profit $30.36Mil ; Cash $29.9Mil + $66Mil ; Borrowings $40.2Mil + $233.2Mil

Conclusion

Either a long term buy (2-3yrs) or short term speculative buy (buy at $0.05-$0.055 and sell at $0.06-$0.065 for 20% returns). I doubt that HMI will show very good profits in the short term as it only has 40% of MMC that's generating all their profits and yet incurring high costs and expenses locally. So, I think HMI must grow their overseas biz to at least 2-3x the current size before we see good economy of scale. In the short term, there may be speculative fervour, fuelled by over-optimism (like CNA forum) which may drive the share price up (my guess is $0.07-$0.10 based on historical data), but, it'll drop back again once investors gets tired of waiting for the profits to come in.

Looking at the other Healthcare stocks, Thomson looks good as it's below NAV and is profitable. I believe Thomson will issue a maiden dividend if they continue to be profitable at year end. That should drive their share price up higher but it'll subsequently still settle down to illiquidity again due to its small caps nature. Raffles Medical has low debts and is profitable but somehow, I don't find it attractive. Parkway will always be the mkt favourite due to its ownership and larger size. Thomson and HMI (MMC anyway) could also potentially be future takeover targets by Parkway as they provide a good fit to their existing portfolio.

Price Chart

• 29-Jul-05 : Start of HMI thread in CNA Forum ; Share Price Range moves up to $0.06-$0.065 in Aug-05
• 30-Jun-05 ($0.045) : MISCELLANEOUS :: HMI TO FOCUS ON HEALTHCARE DELIVERY AND MANAGEMENT CONSULTANCY
• 7-Feb-05 : HALF YEAR FINANCIAL STATEMENT AND DIVIDEND ANNOUNCEMENT
• 27-Aug-04 : FULL YEAR FINANCIAL STATEMENT FOR THE PERIOD ENDED 30-JUN-04

Sources

• 29-Aug-05 : FY05 Results / Press Release
• 30-Jun-05 : Announcement (Write off of Education biz assets)
• 7-Feb-05 : Mid Year Report 2005
• Annual Report 2004
• Annual Report 2003
• Analyst Report - DMG Partners
• CNA Forum

Disclaimer : The above are for my own reference only. Do not rely on it for your investment decisions

# posted by Anonymous @ 8/14/2005 06:38:00 PM