Q&M Dental Group - Maybank Kim Eng 2016-03-02: Positive transition

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Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group (QNM SP) - Positive transition 

In line, one-off legal costs & accounting adjustment 

• FY15 core earnings were in line, at 95% of our FY15E. 
• One-off legal costs for Medium Term Notes (MTN), start-up costs for Aidite’s new factory and accounting adjustments for Aidite were SGD1.5m, nearly offsetting the SGD1.8m gain from a property disposal. 
• Core PATMI grew 30% YoY, with bulk of the growth from the dental services division, and its PBT grew 24% YoY. 
• The manufacturing side was similarly robust, with 15% YoY annualised core PBT growth. 

Picking the low-hanging fruit in Singapore 

• We expect Q&M to accelerate its pace of acquisitions in Singapore for 2016, as it slowed down its China expansion, pending the IPO exercises. 
• Nonetheless, we understand that there is a healthy pipeline of Chinese deals. 
• There is ample room for M&As as Q&M’s market share in Singapore is still low, at only 11-12%. 
• Typical Singapore deals provide profit guarantee of SGD0.3-0.7m, or 3%-6% of FY15 core earnings. Completing the acquisition of Lee & Lee Dental within one month further cemented its commitment. 
• We note that the four deals completed since Sep 2015 should contribute an additional SGD2.4m in FY16, on a pro-rata basis, or 22% of FY15 earnings. 

China business could outperform in 2016 before IPO 

• We expect Q&M’s Chinese subsidiaries to set higher internal targets, to achieve better track record for its upcoming IPO this year. 
• Aidite, Q&M’s manufacturing arm, has shifted to its new factory in Jan 2016 and has increased its production capacity by 67%. Aoxin, the dental hospital group, continues to ramp up its new Huludao Stomatology Hospital and the newly renovated Danan Street Stomatology hospital. 

Maintain BUY; Catalysts from more acquisitions 

• We trim our FY16-17 EPS by 5-6% for higher finance costs and slower expansions in Malaysia. Accordingly, our TP dips to SGD0.88 from SGD0.93, still at 42x FY16 P/E. This is 1SD above its 5-year mean to capture Q&M’s earnings trajectory and M&A track record plus a scarcity premium for healthcare stocks. 
• With SGD65m cash balance, Q&M has plenty of headroom for more acquisitions.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-03-02

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.88 Down 0.93