Q & M Dental Group - Phillip Securities 2016-08-15: Polished results from scaling up

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

Q & M Dental Group - Polished results from scaling up

• 1HFY16 Revenue/PATMI met 41%/49% of our FY16 estimates.
• Manufacturing business held back in 1H2016; optimistic to catch up in 2H2016.
• On track to spin-off listing of Aidite on the New Third Board.
• Declared interim dividend of 0.42 Singapore cents per share (same as 2Q15).

Clinics and Distribution businesses expansion as expected. 

• Dental outlets in Singapore and China increased by 7 and 4 outlets, respectively, compared to 30 June 2015. Meanwhile, dental outlets in Malaysia remain unchanged. As at 30 June 2016, the Group has a total of 68 dental outlets, 4 medical outlets and 1 aesthetic centre in Singapore; a total of 8 dental outlets in Malaysia; and 3 dental hospitals and 8 dental outlets in China.
• Higher turnover from its Clinics businesses, coupled with contribution from the newly acquired dental equipment and supplies distribution company in China, offset the slowdown in Manufacturing business due to Aidite’s relocation.

Manufacturing business to turnaround in 2H16. 

• The Group noted that Operations have since stabilised and sales in June 2016 was higher than June 2015. With capacity doubling to five lines, we expect higher contribution as well as better margin due to economies of scale, from its China Manufacturing business.

Last call to shareholders to spin-off listing of Aidite. 

• An extraordinary general meeting (EGM) will be convened to seek approval of shareholders for the Proposed Spin-off and the Restructuring Exercise on 26 August 2016. 
• Should shareholders vote in favour, the effective interest of the Group in Aidite post Spin-off shall be 38.17%, and the earliest timeline of Aidite’s listing could be by end-2016.

Cash piling up, awaiting deployment. 

• In net debt position of S$23.6mn, the Group’s sat on S$65.5mn war chest as at 30 June 2016. Based on historical deals, the amount could fund acquisitions for at least 20 outlets. 
• We expect the Group to continue its rollup strategy and some add-on acquisitions in Singapore while expanding its footprints in China. 
• The Group stepping up its pace of acquisitions or picking up favourable deals, could lead to rerating.

Maintain NEUTRAL

• We maintain Neutral rating and TP of $0.72, based on unchanged estimated 1.89 Singapore cents FY16 EPS and 38.2x FY16F PER.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-08-15

Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.720 Same 0.720