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Q&M Dental Group - Maybank Kim Eng 2016-06-07: Positive on acquisition of dental lab group in China

Q&M Dental Group - Maybank Kim Eng 2016-06-07: Positive on acquisition of dental lab group in China Q & M DENTAL GROUP (S) LIMITED QC7.SI 

Q&M Dental Group (QNM SP) - Positive on acquisition of dental lab group in China


Third-largest deal in China could open doors to more

  • Q&M has proposed to buy a 33% stake in Shenzhen New Perfect Dental Research (SZNP) for SGD13.8m, with full payment in cash. SZNP operates 16 laboratories that make customised dental prostheses in 15 China cities and has c.650 lab technicians. 
  • This is Q&M’s third-largest deal in China since it acquired a dental hospital group (Aoxin) and a dental supplies manufacturer (Qinhuangdao) in 2014. 
  • Aside from earnings accretion, SZNP’s wide network could help it sniff out more acquisitions. 
  • Maintain BUY & raise TP to SGD1.08, based on 42x FY17E EPS.


Could rerate on more China M&As & vertical drive

  • This deal marks an important milestone for Q&M, as it has not made any major acquisitions in China with sizeable profit guarantees since 2014. Its last four deals were all smaller, with a total profit guarantee of only SGD0.4m. SZNP will add > SGD1m in FY17 and boost China contributions from c.35% in 2016 to c.40% in 2017. 
  • Also, the acquisition of a second large dental supplies company suggests a widening of its M&A net to include more supply companies that can fit into its vertical integration strategy. This suggests higher M&A momentum in future.


Earnings-accretive deal with strong safeguards

  • Based on the profit guarantee of SGD1.03m attached to Q&M's 33% stake, this deal is valued at 13.3x FY17 P/E vs Q&M’s 30.5x. The profit guarantee forms 6%/5% of FY16E/17E earnings. 
  • Management expects to close the deal in late-2016, but we expect early-2017 to allow for extra time. 
  • Safeguards are similar to previous deals. The vendors will guarantee the next 12 years’ profit with a 10% CAGR for the first 6 years. They will also sign a 12-year service agreement.


Raise TP to SGD1.08; Maintain BUY & top sector pick

  • We raise our TP to SGD1.08, up from SGD1.05, after raising our FY17-18E EPS by 4% to include earnings contributions from SZNP. TP is still based on 42x FY17E P/E, 1SD above its five-year mean to capture its M&A potential. 
  • Along with ISEC, Q&M is a top healthcare pick given its EPS growth potential and China healthcare exposure.


Swing Factors


Upside

  • More earnings-accretive acquisitions. Q&M has unutilised 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.

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/ 2016-06-07
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.08 Up 1.05


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