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:
- losses in the medical segment;
- assets written off from the unsuccessful start-up of a new dental clinic; and
- 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:
- 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;
- dividend was raised to SGD1.2cts from SGD0.75cts, backed by robust operating cash flow of SGD17.1m (+56% YoY); and
- 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.
- 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.
- 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.