Q&M Dental Group - CIMB Research 2016-08-12: Earnings growth driven by acquisitions

Q&M Dental Group - CIMB Research 2016-08-12:  Earnings growth driven by acquisitions Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group - Earnings growth driven by acquisitions

  • 2Q16 was in line with our forecast but slightly below consensus. 1H16 formed 49%/46% of our/consensus full-year forecasts.
  • 2Q16 core net profit grew 95% yoy as contributions from new acquisitions kicked in.
  • Aidite’s revenue was down 13% yoy in 2Q due to gestation of shifting to a new factory, but management assured operations have now stabilised.
  • Interim dividend of 0.42 Scts declared, in line with expectations.
  • No change to our EPS forecasts or target price. Maintain Hold.

Earnings were in line with acquisitions driving yoy growth 

  • 2Q16 sales rose 25.6% yoy as contributions from acquisitions kicked in (majority of acquisitions were completed in Sep 15). 2Q core net profit rose an even stronger 95% yoy as core net margins improved 3.4% pts, mostly on the back of lower staff costs. 
  • The strength of Q&M’s M&A model with profit guarantees is indeed showing up in the strong earnings growth. However, these were already in our forecasts and we did not see any big outperformance in profit guarantees. 1H16 net profit was therefore in line.

Aidite sales lower due to downtime 

  • Aidite did run into some operational difficulties in the initial ramp-up following its move to the new factory in Dec 15. Hence, Aidite’s 2Q sales were down 13% yoy. However, we note that sales are up an encouraging 36% qoq and gross margins remain fairly stable.
  • Management also said that operations have already stabilised in Jun. Going forward, we expect stronger performance from Aidite as the move to the new factory roughly doubles production capacity.

Aidite spin-off nearing 

  • Plans on the proposed spin-off for Aidite have also progressed further. Recap that the spin-off will be on the new third board in China, Beijing. 
  • Management said that the rationale for the spin-off is to access additional sources of funding to capitalise on growth opportunities in the capex intensive manufacturing business. 
  • Management is targeting completion by end-16 and we understand Q&M’s eventual effective stake will be c.40%.

Interim dividend unchanged yoy and in line with expectations 

  • The group’s operating cash flows remain strong and we see no threats to dividends.
  • Interim dividend of 0.42 Scts was declared (1H15: 0.42 Scts), representing a payout ratio of c.45%. Balance sheet is also stable with a net gearing of 0.2x as at 2Q16.

Maintain Hold 

  • This set of results did not throw up any surprises. We keep our Hold rating with an unchanged TP of S$0.74 (34.5x CY17 P/E, -1 s.d.). 
  • M&A is a key catalyst for the stock and upside risks could come from outperformance of profit targets. Downside risks include delays in completing acquisitions.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-08-12
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.740 Same 0.740