Q&M Dental Group (QNM SP) - Maybank Kim Eng 2017-03-06: FY16 dragged by higher costs; D/G to HOLD

Q&M Dental Group (QNM SP) - Maybank Kim Eng 2017-03-06: FY16 dragged by higher costs; D/G to HOLD Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group (QNM SP) - FY16 dragged by higher costs; D/G to HOLD


Cut TP 23%, upside risk from strategic review 

  • FY16 headline earnings were lifted by a SGD21.3m gain from the spin-off of Aidite. 
  • Core earnings missed our expectation by 12% due to higher-than-expected costs, amid integration of M&As and spin-off of subsidiaries. 
  • On the positive side, core earnings grew by a commendable 23% YoY, after adjusting for various one-off items. To account for higher integration costs and earnings dilution from spin-off of two subsidiaries, we cut FY17-18E EPS by 19-28%. 
  • We downgrade Q&M to HOLD and reduced our TP by 23% to SGD0.77. Our TP is now based on 36x FY18E EPS, pegged to its long-term forward P/E mean (down from +1SD of 42x).
  • Market anticipation of the strategic review could support the share price, while a positive outcome could pose upside risk to our TP.


Negatives: costs overrun, goodwill impairment 

  • The higher costs were due to: 
    1. losses in the medical segment; 
    2. assets written off from the unsuccessful start-up of a new dental clinic; and 
    3. a goodwill impairment of SGD4.1m for businesses in Malaysia and Singapore (due to a weaker MYR and premium paid for a Singapore M&A).


Positives: growth, dividend, manufacturing segment 

  • Key positives include: 
    1. healthy topline growth of 25% YoY for FY16, driven by acquisition and organic expansion; Q&M added six dental outlets in Singapore and four in China in FY16. Core PATMI also grew by a healthy 50% YoY after adjusting for one-off items; 
    2. dividend was raised to SGD1.2cts from SGD0.75cts, backed by robust operating cash flow of SGD17.1m (+56% YoY); and 
    3. Aidite, the manufacturing arm, delivered good performance after increasing its capacity. Its revenue and PBT grew 35% and 25% YoY, respectively.


Strategic review could support share price 

  • Religare has been appointed to perform a strategic review of Q&M’s business. Management has indicated that it is open to consider all options at the right terms, including selling a stake to strategic shareholders or selling the entire company. 
  • The market’s anticipation of the review could support the stock and a positive outcome could poses upside risk to our TP.


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/ 2017-03-06
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 0.77 Down 1.000



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