Q&M Dental - CIMB Securities 2015-09-23: Group Eagerly-awaited acquisition completed


Q&M Dental Group - Eagerly-awaited acquisition completed 

  • Q&M’s largest acquisition to date, TP Dental, completed slightly ahead of timeline. 
  • Key changes to previous terms include revised profit target of S$3.2m every two years for eight years (prev. S$4m). 
  • Deal still accretive and adds ~21% to dental profits in Singapore. 
  • Target price falls to S$0.92 (still based on 41x CY16 P/E, 12m average) due to reduced profit target. 

Recap on TP Dental deal 

  • TP Dental is a multidisciplinary centre offering a complete range of dental services located in prime locale Ngee Ann City. The S$28.6m acquisition will be paid for in cash (S$18m) and new shares (S$10.6m) and has an implied P/E of 17.9x (based on the new profit target of S$1.6m p.a.). 
  • The deal was initially agreed to in late Apr and slated for completion in Jul. Delays in the due diligence process led us to revise our contribution start date assumptions to Nov, making today’s conclusion ahead of expectations. 

Profit target revised down 20% to S$3.2m every two years 

  • The key change to the agreed terms is the revised profit target of S$3.2m every two years for eight years (previously S$4m). 
  • On the flipside, there is a newly-inserted safeguard where Q&M retains S$1.6m of the cash consideration and Dr. Hwang (lead dentist in TP Dental) will make up for any shortfall in the profit target. 

Downward revision likely due to insertion of safeguard clause 

  • We think the 20% downward revision in profit target is likely due to the insertion of the safeguard clause where Dr. Hwang has to make up for any shortfall. 
  • While this lowers our EPS forecasts, it is worth noting that upside potential is intact as we only model in the profit targets/guarantees. 

Still a good deal despite lower profit target 

  • There is no change to our view that this acquisition reinforces Q&M’s position as the largest private dental group in Singapore and opens up the premium dental healthcare segment. This acquisition also significantly adds to Q&M’s existing dentist pool (+~14%) and the profit target of S$1.6m p.a. increases Q&M’s dental profits in Singapore by about 21%. 
  • The implied P/E of 17.9x is also below the 30-40x of listed healthcare companies and 45-50x that Q&M trades at. 

Maintain Add but with a lower target price of S$0.92 

  • Our target price falls to S$0.92 as we lower our FY16-17 EPS by 2% to factor in the lower profit target. 
  • With ~S$26m still untapped from its S$60m MTN issue, we look forward to more acquisitions. Maintain Add.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-09-23
CIMB Securities Analyst Report ADD Maintain ADD 0.92 Down 0.94