Q&M Dental Group - CIMB Research 2017-03-02: Earnings disappointed, overpriced for low growth

Q&M Dental Group - CIMB Research 2017-03-02: Earnings disappointed; overpriced for low growth Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group - Earnings disappointed; overpriced for low growth

  • 4Q16 core net profit was disappointing. Our forecasts were already the lowest on the street, yet FY16 formed a mere 84% of our full-year forecasts.
  • The miss came from higher costs. By segment, its core primary healthcare reported an 11% yoy PBT decline in FY16, while the distribution business sank into losses.
  • Aidite was arguably the only bright spark (FY16 PBT +25% yoy), yet we expect less P&L contribution in FY17 as the group pares down its stake via a separate listing.
  • We cut our EPS on weaker margins and deconsolidation of Aidite. Downgrade to Reduce with a lower target price of S$0.60.

4Q16 earnings were a big miss 

  • 4Q/FY16’s 761%/148% reported net profit growth was inflated, mostly lifted by a S$21.3m gain from the spin-off of Aidite. This is a non-cash gain, essentially arising from a mark-to-market accounting treatment. 
  • To be fair, we make further adjustments to account for non-core expenses such as 
    1. professional fees relating to the spin-off of Aidite and Aoxin and 
    2. goodwill impairment. 
  • Nonetheless, FY16 core net profit was still a big miss and only formed 84%/79% of our/consensus full-year forecasts.

Missing estimates on the cost side 

  • The key deviation came from higher cost of sales, particularly from segments 
    1. dental and medical clinics and 
    2. dental equipment and supplies. 
  • FY16 PBT from dental and medical clinics declined 11% yoy, while the equipment and supplies distribution sank into PBT losses of S$1.8m (FY15: S$0.1m). 
  • Ex-Aidite’s spin-off gain, FY16 group PBT would have declined 16% yoy and 4Q16 would have reported a loss. Further adding back goodwill impairment (S$4.1m), 4Q/FY16 PBT would be a better +62%/+9%.

Goodwill impairment concerns 

  • While we exclude goodwill impairment when arriving at our core earnings and note that this is a non-cash treatment, we are nonetheless worried that this could be an early red flag. 
  • Furthermore, relative to the group’s FY16 core net profit of S$11.8m, the S$4.1m goodwill impairment is no small sum. We understand that the impairment is half related to its Malaysian equipment and supplies distribution business and half to acquired dental businesses in Singapore.

Higher final dividends offer scant consolation 

  • Final DPS of 0.7 Scts was declared, bringing total DPS for FY16 to 1.12 Scts (FY15: 0.84 Scts). While higher yoy, this translates into a yield of 1.5%, hardly anything to shout about.
  • It announced a strategic review of its business. The company also appointed Religare to undertake a strategic review of its business. In a blue-sky scenario, we think this could be related to a potential takeover offer, which could lend share price support and be a risk to our downgrade.

Downgrade to Reduce with a lower target price of S$0.60 

  • Organic operations have clearly slowed down, forcing us to lower our FY17-18 EPS by 5-6%. 
  • We also grow concerned about the continued earnings disappointments and goodwill impairment. Hence, we now peg our TP to its small/mid-cap peers’ of 28x forward P/E (prev. 34.5x P/E, -1 s.d.), lowering it to S$0.60. Downgrade to Reduce from Hold. 
  • Currently trading at 36x CY17 P/E, the stock was not priced to disappointment.
  • Upside risks include higher-than-expected realised gains from Aidite’s spin-off.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-03-02
CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 0.60 Down 0.770