Q&M Dental Group - Maybank Kim Eng 2016-05-11: 1Q16 Preview ~ Acquisitions Chip In

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

Q&M Dental Group (QNM SP) 1Q16 Preview: Acquisitions Chip In 

Expect record 1Q16, as acquisitions chip in 

• We expect 1Q16 core earnings to rise 21% YoY to SGD3.5m, in line with our full year street-high forecast of SGD17m, as four acquisitions were completed in Sep 2015 – Feb 2016. They have profit guarantees of SGD3.1m a year and should contribute a pro-rated SGD0.8m in 1Q16. 
• We believe a healthy 1Q16 and more acquisitions could trigger a re-rating of the stock. 
• Maintain BUY and SGD0.88 TP, set at 42x FY16E P/E, 1SD above its 6-year mean to capture its M&A track record. 
• We recommend a switch from Raffles Medical to Q&M for more upside potential, greater EPS growth and better China healthcare exposure. 

War chest to fund more 

• Q&M had cash of SGD65m in FY15. 
• It has only utilised SGD28m out of the SGD60m it raised from an MTN issued in Mar 2015. 
• To grow further, we believe it will continue to snap up complementary dental businesses in China and Singapore. 
• Recall that Aidite, a high-tech manufacturer of dental ceramic blocks, was acquired in Aug 2014. Q&M’s subsidiary also proposed to buy Shenyang Lan Hai, a supplier of dental equipment and supplies, in Oct 2015. 

Maintain BUY; sector top pick 

• We believe a healthy 1Q16 and more acquisitions could trigger a rerating of the stock. 
• Q&M’s earnings were weaker QoQ in 4Q15 for the first time since listing due to various one-offs. 
• We started the year with Q&M and Raffles Medical (RFMD SP, BUY, TP SGD1.73) as our top picks in the healthcare sector. Raffles Medical has rallied 19% YTD to 40x FY16E P/E vs Q&M’s -4% YTD to 32x FY16E P/E. 
• We recommend a switch from Raffles Medical to Q&M for more upside potential, greater EPS growth and better China healthcare exposure. 
• Our TP of SGD0.88 is based on 42x FY16E P/E, 1SD above its 6-year mean to capture its M&A track record.

Swing Factors 

Upside 

• More earnings-accretive acquisitions. Q&M has unutilised SGD28m from MTN issued to fund acquisitions. 
• Penetration of China’s lucrative public dental hospitals, which command 90% of the market. 
• JVs or strategic stakes in Q&M by influential Chinese parties, which could introduce more M&A or expansion opportunities. 

Downside 

• Adverse regulatory changes, especially in China, could slow down M&As and penetration of public dental hospitals. 
• Newly-acquired entities may not be able to meet Q&M’s profit targets and adapt to new management. 
• Succession planning. CEO and founder, Dr. Ng, was instrumental in originating and closing most of the deals on favourable terms. 

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-11

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.88 Same 0.88