Q&M Dental Group (QNM SP) - Maybank Kim Eng 2016-11-15: Dragged by higher costs, but operations remain sound

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Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group (QNM SP) - Dragged by higher costs, but operations remain sound

3Q16 missed on higher expenses 

• 3Q16 earnings were below our expectation by c.20% due to: 
  1. expenses for the spinoff of subsidiaries; 
  2. higher marketing expenses; and 
  3. start-up costs for a new clinic. 
• 9M16 earnings met 60% of our FY16E. Core earnings for 3Q16 grew 2% YoY, but fell 25% QoQ. However, core businesses remain sound; topline growth was in line (+27% YoY and +2% QoQ), and momentum in the manufacturing segment continued (+13% QoQ). 
• We cut FY16-18E EPS by 6-15% on higher costs and lower our TP 8% to SGD1.00. 
• Our TP is still based on 42x FY17E P/E, which is +1SD above mean justified by the forecast high profit growth.

Various one-off expenses dragged earnings 

• On a QoQ basis, other expenses and charges increased by c.SGD1m, attributable to several one-off expenses: 
  1. start-up costs of a new clinic of SGD0.5m; 
  2. higher marketing expenses of Aidite; and 
  3. professional fees for the spinoff of Chinese subsidiaries. 
• We note Q&M closed a new clinic due to a lack of patients leading to one-off losses and write offs for renovation and rental deposit. 
• On the other hand, professional fees for spinoffs and marketing expenses of Aidite should decline gradually in the coming quarters.

Core segments remain sound 

• Revenue of the core dental business, which contributed 75% of the group’s revenue, increased 22% YoY. Q&M added five dental outlets in Singapore and four in China. It now has 70 dental outlets in Singapore (vs 65 in 3Q15) and 11 in China (vs 7 in 3Q15). 
• The dental supply manufacturing arm, Aidite, is progressing well since it shifted to a new factory in Dec 2015. Sales increased by 13% QoQ and 25% YoY.

Catalysts from spinoffs and further expansion 

• Q&M is on the lookout for more expansion opportunities. In addition, the stock could react to positive news flow from its proposed spin-off of two Chinese subsidiaries. 
• Our TP is still based on 42x FY17E P/E, 1SD above its long-term mean to capture its high growth potential. 
• Risks to our call include M&A integration risks and adverse regulatory changes.

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 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/ 2016-11-15

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.00 Down 1.080