Q&M Dental Group - CIMB Research 2017-05-11: 1Q17 Uninspiring Organic Growth Likely A Reality

Q&M Dental Group - CIMB Research 2017-05-11: 1Q17: uninspiring organic growth likely a reality Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group - 1Q17: uninspiring organic growth likely a reality

  • No surprises in this set of results. 1Q17 net profit was in line at 24% of our FY17F.
  • 1Q’s modest net profit growth (+3.6% yoy) merely reflects the current low-growth environment and lack of recent acquisitions.
  • No change to our EPS forecasts or target price. Maintain Reduce.

Weak underlying sales growth

  • 1Q group sales were down 6.9% yoy, reflecting the deconsolidation of Aidite which is now equity accounted for under the associates line. 
  • Notwithstanding, sales for the group’s core dental and medical clinic segment were up a meager 2.4% yoy. This was a segment that was growing at c.20% p.a. in the past, as there was a low base effect and it was also lifted by acquisitions. 
  • With no recent M&A activity, we are now seeing the cracks. We remain cautious on the pace of organic growth.

Margins fell on higher staff costs and equipment costs

  • On the cost front, we do see some pressure, driven by higher staff costs and cost of sales in its dental equipment and supplies segment. 1Q17 OP margins were therefore a weaker 15.6% vs. 1Q16’s 17.4%. However, we note that a like-for-like comparison is difficult since 1Q16 included the consolidation of Aidite.
  • On a slightly more positive note, Q&M managed to lower its cost of consumables and supplies for its dental/medical clinic segment. Accordingly, dental consumables/sales improved to 6.2% in 1Q17 (1Q16: 8.1%). However, management attributed the lower cost to a change in accounting treatment where dental instruments are now capitalised. We are therefore unconvinced that this is a structural improvement in costs. Nonetheless, we think 1Q17’s 15.6% can be used as a benchmark for FY17.

2017 likely to focus on organic growth

  • Looking back, we think the management’s focus for the most part of 2015 was looking for acquisition targets and growing the business inorganically. 
  • To their credit, their acquisition strategy was mostly a success even if 1Q17’s results show the difficulty of sustaining such a strategy. In 2016, the focus shifted to spinning off both Aidite and Aoxin, which the management has now completed.
  • We think the focus for 2017 will be on organic growth, which we are not optimistic about. While we do not discount the possibility of smaller M&A deals, we understand that management is reluctant to aggressively embark on another acquisition spree. 
  • In any case, Q&M’s balance sheet is not weak but not particularly strong either (net debt/equity of 0.29x as at end-1Q17).

Maintain Reduce

  • Given the muted growth in organic operations and lack of near-term catalysts, we choose to maintain our Reduce call. 
  • Our TP remains unchanged at S$0.60, still based on 28x CY18 P/E (peer average). 
  • Upside risks include stronger growth following Aoxin’s recent IPO.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-11
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.600 Same 0.600