CIMB Securities 2015-08-13: Q&M Dental Group - 2Q15 Results; Catch-up in 2H15. Maintain ADD.


Catch-up in 2H15 

  • We were expecting a stronger 2H, driven by new acquisitions and seasonality, to help lift full-year earnings. Hence, we view Q&M’s 2Q15 core net profit of S$1.9m as broadly in line with 1H15 forming 36% of our and 37% of consensus FY15 forecasts. 
  • However, the disappointment came from a delay in the completion of its Singapore acquisitions. With completion pushed back by at least a quarter and the lack of new acquisitions, we cut FY15-16 EPS forecasts by 3-11%. 
  • Our target price falls (S$0.94), still based on 41x CY16 P/E (12-month forward average). Maintain Add. Potential catalysts include sizeable acquisitions and capacity ramp-up at Aidite. 

Boosted by gain on sale of property 

  • Q&M’s 2Q15 headline net income of S$3.7m (+212% yoy, +28% qoq) included 
    1.  contributions from Aidite and Aoxin (which were acquired in 2H14), 
    2.  S$1.8m gain on sale of property, and 
    3.  a full quarter of interest expense from its 4.4% S$60m MTN issue (drawdown was in Mar-15). 
  • Ex-gain on sale of property, core net income of S$1.9m advanced a healthy 61% yoy, but dipped 34% qoq due to higher interest expense and cost of dental supplies manufacturing. 

Minimal currency concerns 

  • Despite the weakening ringgit YTD and more recently China’s yuan, we do not expect significant translation losses. Malaysia forms c.10% of group revenue and is naturally hedged. 
  • China comprises 20-25% of group revenue, of which 55-60% of Aidite’s sales are US$ or euro denominated. 

Playing catch-up in 2H 

  • 2H15 was expected to be when the group played catch-up. In addition to seasonal factors (Chinese New Year downtime and increased patient volume in 4Q), we had initially forecasted for its recent acquisitions (TP Dental and the eight dental clinics across Singapore) to start contributing at the start of 3Q15. 
  • However, we now understand that the due diligence process has taken longer than expected, so we think contribution is only likely to begin from Nov 15 onwards. Plus, despite Aidite continuing to deliver sales (+32% qoq) and the dental business remaining stable, higher interest costs will continue to hurt the bottomline until new earnings start to flow through. 
  • Hence, we cut earnings forecasts to reflect a delay in acquisitions. 
  • Q&M still has ~S$26m cash from the initial S$60m MTN issue.

Kenneth NG CFA | Jonathan SEOW | http://research.itradecimb.com/ CIMB Securities 2015-08-13
ADD Maintain ADD 0.94 Down 0.97