Q&M Dental Group (QNM SP) - Maybank Kim Eng 2017-06-05: Leading Dental Group

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

Q&M Dental Group (QNM SP) - Leading Dental Group

Dominant in Singapore, expanding overseas 

• Q&M provides exposure to the niche dental healthcare segment, with an established base at home and expanding rapidly in China. It is the leading dental group in Singapore with a growing presence in China and Malaysia. 
• Q&M operates 71 dental outlets in Singapore, 12 dental outlets in China and 6 dental outlets in Malaysia. It aims to expand its presence in China with the opening of larger dental hospitals, while strengthening its leadership position in Singapore through organic growth. 
• Q&M’s model of acquiring smaller players at EPS-accretive valuations has successfully lifted its growth profile since 2014. We see value in its ability to attract more players in Singapore and China. 
• Maintain HOLD, but cut TP 22% to SGD0.60 to reflect lower growth profile.

Completed spin off should enable better growth 

• Q&M’s earnings have been impacted previously due to weak execution of a newly acquired entity and diversion of management’s attention due to two major spinoffs. After the spinoffs, both entities are set for more expansion, with access to capital and better profile. 
• They are currently planning to build more dental hospitals and capacity expansion.

Key risks: regulation, integration, succession plan 

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

Valuation basis 

• Our revised TP of SGD0.60 is based on 28x FY18E EPS, pegged to 1SD below its long-term forward P/E mean. This is a slight premium to the simple average 2-yr forward P/E mean of small-cap healthcare peers in Singapore of 27x. 
• We have reduced the pegging to its long-term mean of 36x previously to reflect a lower growth profile. We believe this is justifiable given its successful expansion track record overseas, especially in China. Its newly spun off entity, Aoxin Q&M (AOXIN SP, Not-rated) has announced two acquisitions in China, on May 2017. Also, it is planning to build more greenfield hospitals, leveraging on its established base of four dental hospitals and eight dental outlets in China.
• Market anticipation of the strategic review to be conducted by Religare could support the share price, while a positive outcome could pose upside risk to our TP.

Swing Factors

Upside

• More earnings-accretive acquisitions. Q&M has unutilised SGD23m from medium term note 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/ 2017-06-05

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 0.60 Down 0.770