Q&M Dental Group - Maybank Kim Eng 2016-05-24: Dilution overhang removed & TP upgrade

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

Q&M Dental Group (QNM SP) - Dilution overhang removed & TP upgrade 

Overhang removed as stock option lapsed 

• The overhang on the stock was removed on 23 May 2016, after a substantial shareholder, Heritas Helios Investment, allowed its option to subscribe for up to 63m new Q&M shares to lapse. The exercise price was SGD0.66 apiece, or 16.5% discount to today’s closing price. 
• As agreed in 2014, the exercise price was at a 10% discount to 30 days VWAP from 23 May 2016. If exercised, issued shares would have increased by 8%. To recap, Q&M granted the option to Heritas on 24 May 2014, after it acquired 63m shares from existing shareholders. 
• The latest development is positive for the stock as the potential overhang of new scripts in the market has weighed on share price. 

Positive NDR feedback on China’s growth prospects 

• We hosted Q&M for a NDR on 24 May 2016. Investors were positive about Q&M’s growth plans in China and impressed with its accretive M&A track record, which were safeguarded by profit guarantees and long-term service agreements. 
• Management disclosed that its success in acquiring two major players in 2014 has attracted more potential targets. 
• It has also been gaining traction in China, after the acquisitions of three small dental groups and a distributing company in Jan 2016. The number of dental outlets in China has increased to nine in 1Q16, from four. Management hopes to add dental labs and distribution companies, aside from hospitals, in its vertical drive. 

Still growing 

• Singapore Despite focusing more in China, Q&M will continue to grow its core Singapore market. It is now looking at smaller acquisitions and organic growth as prior acquisitions have establish better economies of scale and bargaining power. 

Raise TP to SGD1.05; Maintain BUY & top sector pick 

• We raise our TP to SGD1.05, from SGD0.88 after rolling over our base year to FY17E. TP is still based on 42x P/E, 1SD above its five-year mean to capture its M&A potential. 
• Q&M is our favourite stock in the sector given its upside potential, greater EPS growth and better China healthcare exposure.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-24

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.05 Up 0.88