Maybank Kim Eng Research 2015-07-06: Q & M Dental - Acquiring clinic in China, Minor contributions, expect catalysts from more acquisitions. Maintain BUY.

Acquiring clinic in China 

  • Acquiring 36% effective stake in Panjin Jinsai Dental Clinic for SGD0.8m, at 9.2x forward P/E. 
  • Good relationship forged with Aoxin, expect more China deals via Aoxin to replicate Q&M’s Singapore success. 
  • Raise FY16-17 EPS by 0.4%. Maintain BUY & SGD1.02 TP at 45x FY16 P/E

Expect catalysts from more acquisitions. 

  • Chinese subsidiary acquiring dental clinic Q&M’s 60% subsidiary, Aoxin has proposed to acquire a 60% stake in Panjin Jinsai Dental Clinic. This translates into a 36% effective stake for Q&M. Panjin Jinsai currently owns and operates a dental clinic in Shuantaizi District, Panjin City. 
  • This allows Q&M to add another profitable clinic in the Liaoning Province, where its largest China subsidiary, Aoxin, is based. 

Leveraging on Aoxin’s influence for more acquisitions 

  • This is the fourth dental clinic secured by Aoxin, since its first announcement to acquire Panjin and Gaizhou City Dental Clinics in 3 June 15, which will cost around SGD1.6m. 
  • We believe Q&M and Aoxin have forged a good working relationship and Aoxin could secure more accretive deals, to replicate Q&M’s Singapore success. 

Minor contributions, raise EPS by 0.4% 

  • Q&M will be using funds raised from its recent MTN. 
  • Based on its 12-year profit guarantee, Panjin Jinsai is expected to contribute at least SGD85k in annual earnings to Q&M, from FY16 onwards. This assumes deal completion before end-FY15. 
  • Accordingly, we raise FY16-17 EPS by 0.4%. 

Maintain BUY; catalysts from more acquisitions 

  • Maintain BUY and SGD1.02 TP, based on 45x FY16 EPS. This is 1SD above its 5-year mean to capture Q&M’s strong earnings trajectory, consistent M&A track record and a scarcity premium for healthcare stocks. 
  • With SGD25m of remaining cash from its MTN issue, we expect more acquisitions that could potentially boost our FY16-17 EPS by another 15-18%. 

(John Cheong, Gregory Yap)

Source: http://www.maybank-ke.com.sg