Q&M Dental Group - CIMB Research 2015-12-09: Largest in Singapore, with inroads into China

Q&M Dental Group - CIMB Research 2015-12-09: Largest in Singapore, with inroads into China Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - Largest in Singapore, with inroads into China 

  • 2015 has been a great year for Q&M as it executed its M&A strategy and earnings flowed through from the China acquisitions in 2H14. 
  • 3Q15 showed signs of slowing domestic growth, but earnings growth will likely remain robust after an active year of acquisitions in 2015. 
  • Inorganic growth remains the theme for Q&M. 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$0.84 (based on 34.5x CY17 P/E, 1 s.d. below average 12m forward). 

■ #1 private dental player in Singapore (10-15% market share) 

  • 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 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 it making up 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/ 2015-12-09
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.84 Same 0.84