Singapore O&G Ltd

[valuebuddies]

Seems like there are trying to create a huge alliance? Well I think it's kind of a win win situation for both seller and buyer.

[snapsnap]

if its not a win-win situation then something is fishy liao.
http://www.theedgemarkets.com/sg/article...cs-265-mil

[whatamidoing]

Surprised about the lack of forum commentary on this name. Currently trading at ~40x P/E which are in line with other medical names i.e. Raffles Med, IHH, Q&M. Since the IPO at 25c last year, it is now $1.1ish, making for a fourfold gain.

[specuvestor]

To continue a bit on this sidetrack, let's look at the example of SOG which pays his doctors probably more than the OPMI. Where do you think the SSH interest would lie? I would be cautious with SOG but keep in mind market can remain irrational longer than our tolerance.

It is currently a running stock which I like to highlight as a contrarian example rather than showcase some other companies, including O&G sector, which has the same structural problem and the market has over time realized it.

[TTTI]

To continue a bit on this sidetrack, let's look at the example of SOG which pays his doctors probably more than the OPMI. Where do you think the SSH interest would lie? I would be cautious with SOG but keep in mind market can remain irrational longer than our tolerance.

It is currently a running stock which I like to highlight as a contrarian example rather than showcase some other companies, including O&G sector, which has the same structural problem and the market has over time realized it.

"let's look at the example of SOG which pays his doctors probably more than the OPMI"

Hi, can I ask what do you mean by "pays his doctors more than the OPMI"?
The doctors are associates or employees, how does one compare the remuneration against the minority investor?

[specuvestor]

The SSH are also part of the doctors. If you are the SSH then the most important thing to do post listing is to find ways to liquidate your holdings cause in terms of cashflow as SSH you know it's not going to come from the company. It can take more than 12 months so many will dance with them.

So if you dance with them that's what one has to bear in mind and no complain when the music stops. Different strokes for different folks. Worst are those opmi that doesn't know what tune is being played, doing the cha-cha when it's doing chicken dance

Just make sure one dances in step. It's a big mistake to mix fundamentals into these cases because that's not the tune. There are many such examples it shouldn't be surprising to any seasoned observers.

[weijian]

The SSH are also part of the doctors. If you are the SSH then the most important thing to do post listing is to find ways to liquidate your holdings cause in terms of cashflow as SSH you know it's not going to come from the company. It can take more than 12 months so many will dance with them.

So if you dance with them that's what one has to bear in mind and no complain when the music stops. Different strokes for different folks. Worst are those opmi that doesn't know what tune is being played, doing the cha-cha when it's doing chicken dance

Just make sure one dances in step. It's a big mistake to mix fundamentals into these cases because that's not the tune. There are many such examples it shouldn't be surprising to any seasoned observers.

When SOG is mentioned here in this context, another fallen one (Pacific Healthcare) comes to mind. Granted both are not the same apples, but both depend on star names to attract revenue. It's not easy to fathom why these star names would want to share anything with the OPMIs. If I were one, I wouldn't.

[d.o.g.]

It's not easy to fathom why these star names would want to share anything with the OPMIs. If I were one, I wouldn't.

"Star" or "celebrity" doctors already have a successful practice. The problem is that they can only monetise their "brand" by actually working. When they sell their business to a company and become an employee, they can encash many years of earnings at one go. Usually they are only tied up for 3 or at most 5 years.

So what happens is that the doctor can sell the business for 7-10 times earnings, but is only bound for 3-5 years. The arbitrage opportunity is obvious. And don't forget that during the retention period the doctor is still getting paid a handsome sum.

So, using some crude approximations:

Suppose Doctor X earns $500k per year pre-tax.

Company Y decides to buy Doctor X's business for 6x pre-tax PE or $3m. It agrees to pay Doctor X $200k per year, with profit sharing so that Doctor X will have an incentive to work hard. Profit warranty is $500k per year for the 3 years that Doctor X is contracted for. Profit sharing only kicks in above $500k.

From Company Y's viewpoint, it paid $3m for $300k of pre-tax earnings (since $200k is used to pay Doctor X). This is pre-tax, after tax the PE is 12x. Looks great for a medical business, no? With a profit warranty for 3 years, and profit-sharing to motivate the doctor too.

But what actually happens? Doctor X decides to work just hard enough to meet the profit warranty, so there is no profit sharing. After 3 years, Doctor X gets restless and leaves to restart the business, taking most of the patients to the new practice.

The Company has paid $3m and gotten back only $900k before tax. It now has to hire Doctor Z to replace Doctor X. Doctor Z is not a star and doesn't have a thriving business to sell to the Company. At the same time Doctor Z is not willing to work for below-market rates, so Company Y has to pay Doctor Z $300k. Yet the patient load is lower because they have followed Doctor X to the new clinic. Let's say pretax earnings before paying Doctor Z drop 20% from $500k to $400k. After paying Doctor Z $300k, the practice only earns $100k before tax.

Company Y paid $3m and earned back $900k, so net remaining cost is $2.1m on which it earns $100k before tax. After tax the PE is 25x. It doesn't look like such a good deal after all.

What about Doctor X? In exchange for taking a 60% paycut for 3 years (1.8 years of paycut), Doctor X collected 6 years of earnings upfront. So on a net basis, Doctor X has come out ahead by 4.2 years of earnings, and this is before taking into account the time value of money.

So, if the above calculations bear any resemblance to reality, there will be plenty of "Doctor X" stars willing to sell their practice.

[whatamidoing]

It's not easy to fathom why these star names would want to share anything with the OPMIs. If I were one, I wouldn't.

"Star" or "celebrity" doctors already have a successful practice. The problem is that they can only monetise their "brand" by actually working. When they sell their business to a company and become an employee, they can encash many years of earnings at one go. Usually they are only tied up for 3 or at most 5 years.

So what happens is that the doctor can sell the business for 7-10 times earnings, but is only bound for 3-5 years. The arbitrage opportunity is obvious. And don't forget that during the retention period the doctor is still getting paid a handsome sum.

So, using some crude approximations:

Suppose Doctor X earns $500k per year pre-tax.

Company Y decides to buy Doctor X's business for 6x pre-tax PE or $3m. It agrees to pay Doctor X $200k per year, with profit sharing so that Doctor X will have an incentive to work hard. Profit warranty is $500k per year for the 3 years that Doctor X is contracted for. Profit sharing only kicks in above $500k.

From Company Y's viewpoint, it paid $3m for $300k of pre-tax earnings (since $200k is used to pay Doctor X). This is pre-tax, after tax the PE is 12x. Looks great for a medical business, no? With a profit warranty for 3 years, and profit-sharing to motivate the doctor too.

But what actually happens? Doctor X decides to work just hard enough to meet the profit warranty, so there is no profit sharing. After 3 years, Doctor X gets restless and leaves to restart the business, taking most of the patients to the new practice.

The Company has paid $3m and gotten back only $900k before tax. It now has to hire Doctor Z to replace Doctor X. Doctor Z is not a star and doesn't have a thriving business to sell to the Company. At the same time Doctor Z is not willing to work for below-market rates, so Company Y has to pay Doctor Z $300k. Yet the patient load is lower because they have followed Doctor X to the new clinic. Let's say pretax earnings before paying Doctor Z drop 20% from $500k to $400k. After paying Doctor Z $300k, the practice only earns $100k before tax.

Company Y paid $3m and earned back $900k, so net remaining cost is $2.1m on which it earns $100k before tax. After tax the PE is 25x. It doesn't look like such a good deal after all.

What about Doctor X? In exchange for taking a 60% paycut for 3 years (1.8 years of paycut), Doctor X collected 6 years of earnings upfront. So on a net basis, Doctor X has come out ahead by 4.2 years of earnings, and this is before taking into account the time value of money.

So, if the above calculations bear any resemblance to reality, there will be plenty of "Doctor X" stars willing to sell their practice.

Agreed. 

Also believe that SOG mentioned at time of listing that they were following the Q&M model - using equity capital (which can be liquidated by the new doctors, or to be used to get ever increasing dividends) to bring in new doctors and to expand. This model has proven very successful for Q&M and their shareholders.

[EUDA]

It's not easy to fathom why these star names would want to share anything with the OPMIs. If I were one, I wouldn't.

"Star" or "celebrity" doctors already have a successful practice. The problem is that they can only monetise their "brand" by actually working. When they sell their business to a company and become an employee, they can encash many years of earnings at one go. Usually they are only tied up for 3 or at most 5 years.

So what happens is that the doctor can sell the business for 7-10 times earnings, but is only bound for 3-5 years. The arbitrage opportunity is obvious. And don't forget that during the retention period the doctor is still getting paid a handsome sum.

So, using some crude approximations:

Suppose Doctor X earns $500k per year pre-tax.

Company Y decides to buy Doctor X's business for 6x pre-tax PE or $3m. It agrees to pay Doctor X $200k per year, with profit sharing so that Doctor X will have an incentive to work hard. Profit warranty is $500k per year for the 3 years that Doctor X is contracted for. Profit sharing only kicks in above $500k.

From Company Y's viewpoint, it paid $3m for $300k of pre-tax earnings (since $200k is used to pay Doctor X). This is pre-tax, after tax the PE is 12x. Looks great for a medical business, no? With a profit warranty for 3 years, and profit-sharing to motivate the doctor too.

But what actually happens? Doctor X decides to work just hard enough to meet the profit warranty, so there is no profit sharing. After 3 years, Doctor X gets restless and leaves to restart the business, taking most of the patients to the new practice.

The Company has paid $3m and gotten back only $900k before tax. It now has to hire Doctor Z to replace Doctor X. Doctor Z is not a star and doesn't have a thriving business to sell to the Company. At the same time Doctor Z is not willing to work for below-market rates, so Company Y has to pay Doctor Z $300k. Yet the patient load is lower because they have followed Doctor X to the new clinic. Let's say pretax earnings before paying Doctor Z drop 20% from $500k to $400k. After paying Doctor Z $300k, the practice only earns $100k before tax.

Company Y paid $3m and earned back $900k, so net remaining cost is $2.1m on which it earns $100k before tax. After tax the PE is 25x. It doesn't look like such a good deal after all.

What about Doctor X? In exchange for taking a 60% paycut for 3 years (1.8 years of paycut), Doctor X collected 6 years of earnings upfront. So on a net basis, Doctor X has come out ahead by 4.2 years of earnings, and this is before taking into account the time value of money.

So, if the above calculations bear any resemblance to reality, there will be plenty of "Doctor X" stars willing to sell their practice.

Specifically on "taking most of the patients to the new practice." - I've seen this happen more than once, but equally often, the non-compete provisions will operate to prevent this from taking place straightaway.  There are also instances of star professionals getting screwed over in such a scenario when they realise that they dislike their new owners but the non-competes are almost watertight.

But on this topic of monetising star professionals, I'm not sure I've seen a model I'm personally comfortable to invest in because there's simply so much key man risk I'm hesitant to ascribe a value to the company's operations.  For example - IMHO - talkmed is one example of this except that the star is the main owner as well, so maybe that makes more sense.