Q&M Dental Group - Maybank Kim Eng 2015-11-17: Strong delivery; expect more to come

Q&M Dental Group - Maybank Kim Eng 2015-11-17: Strong delivery; expect more to come Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - Strong delivery; expect more to come 

  • 3Q15 in line, 9M15 formed 65% of our FY15F. Two major acquisitions completed in Sep 2015 will boost earnings in the quarters ahead and we expect more deals to come. 
  • Acquisition model has shown great success in delivering sustainable growth and is increasingly replicated across the niche medical industry, ie. ISEC and Singapore O&G. 
  • Maintain BUY and TP of SGD0.97, based on 42x FY16 EPS, 1SD above its LT mean. Catalysts from more acquisitions. 

Strong delivery despite negative carry from MTN 

  • 3Q15 core earnings and operating cash flow grew 17% YoY, largely due to Chinese acquisitions completed in 3Q15 and one month contributions from TP Dental and Tiong Bahru Dental Clinic acquired in Sep 2015. 
  • The earnings growth would have been higher, at 45%, if we exclude SGD0.7m financing costs in the quarter from MTN issued in Mar 2015. 
  • Expect stronger 4Q from full quarter contributions of the two acquisitions and seasonality. 

A sound business model that is increasingly valuable 

  • Q&M’s model of acquiring smaller players at earnings accretive valuations has successfully lifted its growth profile since 2014. 
  • We see great value in its ability to attract more players in Singapore and China to join its family, as it continues to build a strong track record. Two major deals completed in Sep 2015 are good examples. 
  • Beyond financials and its watertight structure in the form of profit guarantee and retaining joint ownership for the sellers, we are impressed with its practice of going into great lengths in its due diligence process. 
  • We note that it performs majority of the process with experienced in-house professional team which focuses highly on cash auditing and does not cut corners regardless of the deal size. 
  • During our recent company visit with a client in Oct 2015, we were impressed that its CFO went to China personally to perform due diligence on a small deal, worth only SGD1.7m. 
  • Operationally, Q&M has also put in great effort to share its expertise and business model with its new partners, to unlock revenue synergies.

John Cheong Maybank Kim Eng | Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-11-17
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.97 Same 0.97