Q & M Dental Group - Phillip Securities 2016-05-16: Acquisitions brushed up results

Q & M Dental Group - Phillip Securities 2016-05-16: Acquisitions brushed up results  Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q & M Dental Group - Acquisitions brushed up results

  • Revenue and PATMI came in at c.21% and c.25% of our FY16 forecasts respectively.
  • Expansion efforts paid off. Higher revenue from Clinic Services cushioned slowdown in other segments.
  • More M&As from China business could be a rerating catalyst.
  • Maintain Neutral with higher TP at S$0.72.

 Clinic Services: A good start in 1Q16, more clinics to chip in

  • New and existing dental outlets in Singapore (+14.05% yoy) and the acquisitions in Singapore and China (+14.05% yoy) contributed to the growth in topline. The higher turnover was mainly driven by higher patient volume. 
  • Its venture into the premium market (acquisition of TP Dental) lifted overall purchase price of consumables. 
  • Gross margin was slightly compressed by 40 bps to 91.9%. 
  • Nonetheless, Management shared that cost control measure should normalize the margin in coming quarters.

 Distribution Business: Weaker Malaysia, cushioned by new China venture

  • Excluding the newly acquired China company (Shenyang Mao Tai Q & M Medical Equipment Leasing Co., Ltd.), its distribution business would have fallen by c.35% yoy. 
  • Management noted the high base effect in Malaysia due to the front-loading purchase ahead of Goods and Services Tax (GST). Malaysian government implemented a 6% GST in Apr-15. 
  • Management also noted that its equipment sales in Singapore slowed, as there were more new dental clinics opened and replacing their equipment in 1Q15; however the supplies business in Singapore was stable.

 Manufacturing Business: Top-line affected by lower volume, but sees better margin 

  • Management shared that 1Q16 efficiency of delivery was affected by the shift to the new factory location in Dec-15, resulting in a lower turnover. However, change of product mix and better operational efficiency enhanced gross margin from 66.5% in 1Q15 to 77.5% in 1Q16, mitigated the negative impact. 
  • Management shared that there were more zirconia blocks (higher margin) sold as compared to the sales of millers in 1Q16. The new factory with double its previous capacity should continue to reap the benefits of economies of scale. 
  • Meanwhile, the efficiency of delivery should pick up soon as transition phase ends.

 New term loan: More exciting M&As?

  • The Group’s China subsidiary took on a new 3-Year SGD denominated term loan of S$10mn, with effective interest rate of 3%, for general corporate, merger and acquisition purposes. Its expansion into private dental healthcare market in China would spur the next phase of growth as the Singapore market saturates.

 Progress in spinning off Qinghuadao Aidite: 2.74% decrease in shareholding interest 

  • The Group has decreased its shareholding interest in its indirect subsidiary, Qinghuadao Aidite, from 51% to 48.256% on 29 Apr 16. Aidite is now an indirect associate of the Group. The change in shareholding interest is in pursuant to the completion of a subscription agreement entered between Aidite and Jie Ying, where Jie Ying will subscribe 5.4% of shares in Aidite.
  • Jie Ying is a limited partnership registered in the PRC with Mr. Li Hongwen, the founder and Chairman of Aidite, as the general partner. The objective of the subscription agreement is to hold shares on trust for employees of Aidite. Employees who are entitled to the subscription shares are required to enter into employment agreements ranging from 3 to 6 years.
  • Nonetheless, no major developments on the proposed spin-off listing have been announced.

Investment Actions

  • We adjusted the forecasted number of dental outlets in China in view of the new term loan taken. This translates to a higher estimated 1.88 cents FY16 EPS (previous: 1.83 cents). Nonetheless, the Group stepping up its pace of acquisitions or picking up favourable deals, could be a potential rerating catalyst.
  • We maintain Neutral rating with TP of $0.72, based on PER multiple of 38.2x FY16F PER (a slight premium compared to its Asian peers, but 0.5 std. dev. lower from its 4-year historical PER).

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-05-16
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.72 Up 0.70