Q&M Dental Group - Maybank Kim Eng 2016-05-16: A good start; More China M&As could lead to rerating

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

Q&M Dental Group - A good start; More China M&As could lead to rerating

1Q16 core earnings grew 17% YoY and came in within expectations, at 22% of our FY16E.
The earnings growth would have been higher, at 51% if we exclude the SGD0.7m financing costs in the quarter from SGD60m MTN raised in Mar 2015.
Revenue of the core dental business, which contributed 82% of the group’s revenue, increased 28% YoY.

It completed 4 acquisitions in Singapore and 4 smaller acquisitions in China, from Sep 2015 – Mar 2016.
It has 68 dental outlets vs 60 dental outlets in 1Q15 in Singapore and number of dental outlets in China increased to 9 from 4.

Revenue of the dental supplies manufacturing segment fell 16% YoY, due to shifting to a new factory in Dec 2015.
On the other hand, revenue grew by 108% QoQ, showing a significant improvement from 4Q15, which was hit by shifting and accounting adjustments.
We expect the revenue to improve in the subsequent quarters, as productions ramp up after the > 60% increase in capacity.
We remain confident on our 40% revenue growth forecast for this segment.

We estimate that China contributes c.35% of Q&M’s earnings for FY16 vs 0% for Raffles Medical (RFMD SP, BUY, TP SGD1.73) and Cordlife (CLGL SP, HOLD, TP SGD1.59).
Q&M continues to build a good track record in China, as an established Singapore brand. Completing the acquisitions of 3 dental groups and a distributing company in Jan 2016 indicates that it is gaining traction there. More offers could knock on Q&M’s doors and the stock could command a higher valuation multiple for its success in China.

We started the year with Q&M and Raffles Medical 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.

More earnings-accretive acquisitions. Q&M has un-utilised SGD23m 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.

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/ 2016-05-16

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