Q&M Dental Group - Maybank Kim Eng 2016-09-06: Taking Three Small Bites

Q&M Dental Group (QNM SP) - Maybank Kim Eng 2016-09-06: Taking Three Small Bites Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group (QNM SP) - Taking Three Small Bites


Completed three small Singapore acquisitions 

  • Q&M has acquired Singapore-based Ho Dental Surgery, Toofy and Jurong Point Dental Surgery
  • Priced at 7-8x P/E, three deals will provide 5-8 years of profit guarantee of SGD0.4m pa. Aside from the cheap valuation, these small acquisitions will enable Q&M to expand its footprint, tap into a wider customer database, and extract greater profitability from improving the existing operations. 
  • Maintain BUY and TP of SGD1.08. 
  • Catalysts: News flow from spin-offs and further expansions.


Adding a dental clinic & four dentists 

  • The first deal, Ho Dental surgery, involves the acquisition of a dental clinic in Marine Terrace, along with two dentists. Dr. Ho Chuk Ping, the vendor, has 31 years of experience. Dr. Ang, the vendor of Toofy, likewise has 30 years of experience. She will relocate to Q&M’s subsidiary, TP Dental outlet on Orchard Road. For the third deal, the vendor of Jurong Point Dental Surgery, Dr Chong has 24 years of experience.


Expect more low hanging acquisitions in Singapore 

  • Aside from the cheap valuation, these small acquisitions provide Q&M immediate access to new locations and tap into a patient base accumulated throughout the years. 
  • Despite its leading position in Singapore, Q&M commands only about a 7% market share in terms of no. of dental clinics; it runs c.70 dental outlets vs a total of c.1,000 in Singapore. 
  • From its improving M&A track record and market leadership position, we expect more dentists to knock on Q&M’s door. 


Catalysts: More expansion & news flow of spin-off 

  • Q&M is on the lookout for more expansion opportunities; its proposed acquisition of Shenzhen New Perfect dental laboratory group is going through the due diligence process. 
  • On the other hand, the stock could react to positive news flow from its proposed spin-off of two Chinese subsidiaries. Management targets to complete the spin-offs by end-2016.
  • Our TP is still based on 42x FY17E P/E, 1SD above its long-term mean to capture its M&A led growth potential.


Swing Factors


Upside

  • More earnings accretive acquisitions. Q&M has unutilised SGD23m from MTN issued to fund acquisitions.
  • Penetration of China’s lucrative public dental hospitals, which command 90% of the market.
  • JVs or strategic stakes in Q&M by influential Chinese parties, which could introduce more M&A or expansion opportunities.

Downside

  • Adverse regulatory changes, especially in China, could slow down M&A activity and penetration of public dental hospitals.
  • Newly acquired entities may not be able to meet Q&M’s profit targets and adapt to new management. 
  • Succession planning. CEO and founder, Dr. Ng, was instrumental in originating and closing most of the deals on favourable terms.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-06
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.080 Same 1.080


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