Q&M Dental Group - CIMB Research 2016-03-01: Abscess under the crown

Q&M Dental Group - CIMB Research 2016-03-01: Abscess under the crown Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group - Abscess under the crown 

  • 4Q15 net profit came in way below expectations on Aidite’s weak showing. FY15 formed only 81% of our and 82% of consensus full-year forecasts. 
  • Headline net profit (S$11.4m) included non-core PPE gains (S$1.8m) and PIC credits (S$1.1m), without which FY15’s net profit would have been flat. 
  • FY15 core EPS was worse, down 8% yoy due to dilution. This is very disappointing given expectations from new acquisitions and full-year contributions from China. 
  • Downgrade to Reduce as we cut FY16-17F EPS by 18-23% on lower sales. 

■ Disappointing 4Q; huge miss from Aidite 

  • 4Q’s core net profit of S$2.1m (-43% yoy) was far below our S$4.3m expectation. The miss came largely from Aidite which is supposed to be a stable and high margin business, but disappointed as sales failed to materialise and its COS spiked. Higher staff costs made things worse. 
  • If we exclude non-core gains (PPE disposal and PIC credits), FY15 core net profit would be flat at S$8.6m. 
  • Overall, this was very disappointing given expectations of new acquisitions kicking in and full-year contributions from China. 

■ Poor 4Q showing at Aidite, even if not that bad on FY basis 

  • Expectations were running high as Aidite was viewed as high growth, high margin. 
  • After Aidite’s continued outperformance over 9M15, its whopping 59% yoy plunge in sales and margin compression (20% GPM vs. average of 65% over the past four quarters) in 4Q15 came as a rude shock. This dragged overall group OP margins to a mere 8.2% in 4Q15 (9M15: 18.2%; FY14: 12.2%). 
  • Notwithstanding, we note that on a full-year basis, Aidite managed to outperform its profit guarantee. 

■ Burden of interest expenses hurt further 

  • Q&M’s aggressive part-cash, part-equity M&A strategy is premised on being able to acquire targets at a fraction of the multiple their shares are traded at. However, recall that the cash is funded via a 4.4% S$60m MTN issue in Mar 15. 
  • Interest costs therefore eroded profitability. With the added impact of share dilution, FY15’s core EPS declined 8% yoy. 
  • Based on completed acquisitions since the MTN issue, we estimate that the c.S$3m of guaranteed net profit only just covers interest costs. 

■ Updates on M&A 

  • Of the 10 deals announced since the MTN issue, Q&M has only completed four. While the remaining six deals are already undergoing due diligence, we are mindful that they are smaller in size (~1/3 of profits) and that deals in China take longer to complete. 
  • In total, the four completed deals form c.24% of our FY16F net profit. 

■ Downgrade to Reduce 

  • We understand Aidite incurred one-off adjustments in 4Q, but at 44x CY16 P/E, Q&M was not priced to disappoint.
  • Our EPS cuts come mainly from lower sales and margin assumptions. 
  • We downgrade to Reduce from Add as our target price falls to S$0.64, still pegged at 34.5x CY17 P/E (1 s.d. below mean). 
  • Trading at a lofty 44x/38x CY16/17 P/E, valuations look rich compared to the sector average of 23x/22x. 
  • Risks to our downgrade include outperformance of profit targets and more acquisitions. 

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-03-01
CIMB Securities SGX Stock Analyst Report REDUCE Downgrade ADD 0.64 Same 0.84