Q&M Dental Group - CIMB Research 2015-10-05: Largest in Singapore with inroads to China

Q&M Dental Group - CIMB Research 2015-10-05: Largest in Singapore with inroads to China Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group Largest in Singapore with inroads to China 

  • Q&M is the largest private dental group in Singapore, with a 10-15% market share. 
  • China is the next leg of growth, which we estimate will form ~40% of group earnings. 
  • Upside to our numbers exists as profit guarantees/targets only form base-case earnings. 
  • Q&M is our top small/mid-cap healthcare pick. Maintain Add with a target price of S$0.92 (still based on 41x CY16 P/E, 12m average). 

#1 private dental player in Singapore 

  • With the acquisition of nine dental clinics in Singapore this year alone, Q&M has further strengthened its position as the largest private dental group in Singapore (more than 70 clinics with a 10-15% market share). 
  • The group has also recently completed the acquisition of TP Dental (a dental clinic targeting the premium segment), which we estimate will add at least 20% to Q&M’s dental profits in Singapore. 

China could form up to 40% of group earnings 

  • In addition to acquisitions in Singapore contributing to earnings, the other driver is earnings from China finally flowing through. The acquisitions of Aoxin and Aidite in 2H14 not only added another stream of earnings for Q&M, it placed the group on a new growth trajectory where earnings CAGR over FY15-17F is expected to be in the 20-30% range (vs. historical 5-10%). 
  • We see China making up ~40% of the group’s earnings. Aidite (crown manufacturer) will be a key driver of group earnings Aidite’s FY14 net profit of ~S$1.3m formed 15% of total earnings despite only five months of contribution. We think Aidite will become increasingly important to group earnings, driven by 
    1. a new production plant that will close to double current capacity (expected completion end-15), and 
    2. increasing penetration rates of CAD/CAM technology, which will drive demand for Aidite’s zirconia crowns. 

Upside potential to profit guarantees/targets 

  • As part of Q&M’s M&A strategy, the company often inserts profit guarantees or targets into the agreements where the acquiree has to make up for any shortfall in earnings. 
  • We remind investors there is upside potential as we have factored in acquisitions at their profit guarantees/targets. These only form the base case and it is not unreasonable to anticipate some outperformance. 

Still has cash for inorganic opportunities 

  • With ~S$26m still untapped from its S$60m MTN issue, we look forward to more acquisitions. Other catalysts include the potential listing of its China business.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-05
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.92 Same 0.92