Q&M Dental Group - CIMB Research 2016-11-14: 3Q16 results missed as costs bit through

Q&M Dental Group - CIMB Research 2016-11-14: 3Q16 results missed as costs bit through Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group - 3Q16 results missed as costs bit through

  • 3Q16 net profit (S$2.8m, +3% yoy) disappointed and only made up 18% of ours and consensus full year forecasts. 9M16 NP below at 67% of our FY16 forecast.
  • Main problem areas were escalating costs in both the equipment distribution and manufacturing (Aidite) segments. 3Q16’s 13.6% OPM was below (3Q15: 17.3%).
  • Group sales growth of 27% yoy due to contributions from acquisitions. Earnings growth would otherwise have been negative. We cut FY16 EPS due to results miss.
  • Our TP rises only as we roll forward to CY18. Maintain Hold.

Weak earnings on higher costs 

  • 3Q16’s 3% yoy net profit growth was poor, especially in light of contributions from multiple acquisitions which should have inflated this quarter’s yoy comparison.
  • Escalating costs were the main reason for 3Q’s lacklustre results, while organic growth certainly slowed. The group’s diluted stake in Aidite (now c.48% from 51% previously) did not help either. Notwithstanding an S$0.55m non-core PIC cash payout in 3Q15, we still view this quarter’s net profit growth as weak. 3Q formed only 18% of our FY16F.

Sales growth mostly driven by acquisitions 

  • On sales growth (+27.2% yoy), all segments did relatively well but were mostly lifted by acquisitions. 
  • By segment, dental and medical clinics sales growth (+22% yoy) was mostly driven by newly contributing Singapore acquisitions including TP Dental. 
  • The equipment and supplies distribution business (+83% yoy) was lifted by its Shenyang Maotai acquisition in China. 
  • Aidite’s growth (+25% yoy) was driven by added production lines after moving to a new factory.

Cost pressures from distribution and Aidite segments 

  • Unfortunately, cost escalation more than eroded the positive sales growth. Main culprits were 
    1. supplies distribution business, where a weaker ringgit increased the cost of its imports (3Q16 cost/sales ratio rose to 71.8%; 3Q15: 63.4%), and 
    2. Aidite, which management attributed to unfavourable sales mix of lower-margin machines and higher R&D expenses (Aidite’s 3Q16 cost/sales ratio rose to 43.4%; 3Q15: 32.6%). 
  • To be fair, all other cost items were in check.

Aidite spin-off updates 

  • Shareholder approval has been obtained for Aidite’s spin-off and the separate listing could be completed as early as FY16. 
  • Recap that the spin-off will be on the new third board in Beijing, China. Our view on the spinoff ultimately hinges on the price they get, and one of our biggest concerns is ownership dilution that is likely to cause a dent on earnings. This provides downside risks to our FY17-18F EPS. We understand Q&M’s eventual effective stake will be c.40% (from c.48% currently).

Maintain Hold 

  • We cut our FY16F EPS forecast by 9% on the back of its weak results. However, our TP rises to S$0.77 as we roll forward to CY18. 
  • No change to our TP basis, still based on 34.5x P/E, its -1 s.d. level. The stock is currently trading at a lofty 34x CY17 P/E, despite cost pressures and slowing organic growth. 
  • Small-mid cap healthcare services peers trade at a cheaper 20x. 
  • Maintain Hold. 
  • Upside risks include higher than expected valuations from Aidite’s spin-off and sizeable earnings accretive acquisitions.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-11-14
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.77 Up 0.740