Q&M Dental Group - CIMB Research 2015-11-16: Not pretty but we let it go for now

Q&M Dental Group - CIMB Research 2015-11-16: Not pretty but we let it go for now Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - Not pretty but we let it go for now 

  • 3Q15 earnings made up 23% of our full-year forecast while 9M made up 63%, which we deem in line as newly-completed acquisitions will contribute more in 4Q. 
  • Topline growth slowed (+7.6% yoy vs. average of +31% since 2012), which would have been flat if not for acquisitions. 
  • Organic growth can no longer be taken for granted and our EPS cuts reflect this, but acquisitions completed in FY15 will help drive growth. 
  • Maintain Add; further M&A and outperformance of profit targets the key catalysts. 

■ 3Q15 spells limited organic growth 

  • We believe Q&M’s 3Q15 results indicate challenging market conditions. 
  • There was topline growth but it was weaker than before (+7.6% yoy vs. average of +31% since 2012) and if we excluded timing differences from new acquisitions, we think topline growth would have been flat. 
  • Net profit did grow 16.7% yoy to S$2.7m but this was shored up by a S$0.55m PIC cash payout, excluding which earnings would have dipped 6.8%. 

■ Single-digit topline growth the new norm? 

  • Single is the new double. Q&M’s core dental and medical clinic segment (~78% of group revenue) reported 6% topline growth in 3Q, with the bulk of growth attributed to newlycompleted acquisitions. This is in contrast to the 17-32% yoy growth reported since 1Q12. 
  • The clear slowdown is not exclusive to Q&M and other healthcare companies are also reporting single-digit topline growth. Having said that, we project double-digit growth in 4Q15 as newly-completed acquisitions contribute one full quarter. 

■ Recent downward profit revisions indicative of a weaker climate? 

  • Targets are either becoming tougher negotiators or are less confident of their business outlook. TP Dental’s 20% profit guarantee downward revision has set a worrying precedent and it appears others are asking for similar discounts. 
  • Most recently, its Aesthetics Dental acquisition was also completed with a 20% downward revision in profit, albeit with an extra 2 years added to the service contract. 
  • Nevertheless, at the lower profit numbers, these acquisitions still imply attractive valuations of 12-18x P/E. 

■ M&A still in play 

  • Following major acquisitions in 2H14 (Aoxin and Aidite), 2015 followed a similar theme. The group still has ~S$26m left untapped from its S$60m MTN issue and we believe Q&M will remain active on the M&A front. 
  • Delays in the due diligence process and downward revisions to initial agreements do not give us confidence. Risks, therefore, include the timing and price of new deals. 

■ Maintain Add, with M&A as the key re-rating catalyst 

  • We think growth will be mostly driven by acquisitions. We cut our FY15-17 EPS by 1- 14% as we lower our organic growth assumptions in view of weaker market conditions and downward revisions to profit targets. 
  • Our target price is cut to S$0.84 as we roll forward with a lower P/E multiple of 34.5x (1 s.d. below historical average of 41x but still above peers) vs. 41x previously. 
  • Maintain Add, with further M&A and outperformance of profit targets the key catalysts.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-16
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.84 Down 0.92