Q & M Dental Group - CIMB Research 2016-01-08: Flossing through Aidite’s spin-off

Q&M Dental Group - CIMB Research 2016-01-08: Flossing through Aidite’s spin-off Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - Flossing through Aidite’s spin-off 

  • As Q&M trades at 36x CY16 P/E, Aidite spin-off only justified if at higher valuations. 
  • The obvious negative is dilution in Aidite’s earnings will amount to a 9-10% fall in FY16-17 core net profit upon spin-off. 
  • The positive would be if the spin-off fetches lofty valuations. This is possible as its Chinese peers trade at 58x forward P/E. 
  • If vendor shares are sold, shareholders could get a special dividend (~8% yield). 
  • Variables that may tilt our view 
    1. Q&M’s eventual stake and 
    2. Aidite’s selling price. 

Aidite spin-off could be completed as early as 1H16 

  • Q&M’s proposed spin-off of Aidite is drawing closer. The company indicated the spin-off will be completed on an over-the-counter securities trading platform, the new third board in Beijing. 
  • We think that the separate listing of Aidite could be completed as early as 1H16, with Aoxin’s spin-off to follow closely after. 

How important is Aidite to Q&M now? 

  • 51%-owned Aidite makes up about 29% of CY15 group net profit, by our estimates. Accordingly, a key concern which investors voiced was whether a spin-off would truly create value, especially given that Q&M is trading at a lofty 36x/29x CY16/17 P/E. 
  • Any spin-off would therefore have to be completed at even higher valuations. For comparison, peers in China are trading at 58x CY16 P/E. 

Impact of a spin-off on the group’s books and valuation 

  • Our sensitivity analysis estimates different outcomes depending on Q&M’s eventual ownership and selling price. 
  • In our base case assumption where Q&M pares down its stake in Aidite to 30% and lists at a valuation of 30x CY16 P/E, FY16-17 core net profit falls 9-10% with a corresponding 11% drop in target price to S$0.75 (from S$0.84). However, we are cognisant that there are upside risks as our base case scenario of a 30x P/E multiple is below the 58x that listed peers in China trade at. 

Potential for special dividend? 

  • There is also the possibility of a special dividend if vendor shares are sold at listing (representing a yield of up to 8%). 
  • In a blue-sky scenario, if Aidite lists at 60x P/E, Q&M could net proceeds of c.S$92.5m which represents a yield of 17%. 

Maintain Add, EPS forecasts and TP stay intact 

  • Overall, we conclude that the merits of a spin-off very much depend on 
    1.  Q&M’s eventual stake and 
    2.  selling price. 
  • The tipping point would be whether Aidite fetches valuations that would adequately compensate for the loss of earnings, while the icing on the cake would be the possibility of special dividends. 
  • We keep our forecasts and target price of SGD0.84, still pegged at 34.5x CY17 P/E (1 s.d. below historical average). Maintain ADD.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-01-08
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.84 Same 0.84