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
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Kenneth NG CFA
CIMB Securities
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http://research.itradecimb.com/
2016-03-01
CIMB Securities
SGX Stock
Analyst Report
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