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

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.

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).

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.

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.

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