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
- a new production plant that will close to double current capacity (expected completion end-15), and
- 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
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Kenneth NG CFA
CIMB Securities
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http://research.itradecimb.com/
2015-12-09
CIMB Securities
SGX Stock
Analyst Report
0.84
Same
0.84
