Q&M Dental Group - CIMB Research 2018-01-07: More Bite-sized Growth To Come

Q&M Dental Group - CIMB Research 2018-01-07: More Bite-sized Growth To Come Q & M DENTAL GROUP (S) LIMITED QC7.SI

Q&M Dental Group - More Bite-sized Growth To Come

  • Leading private dental healthcare provider to continue its pursuit of acquisitions.
  • Our FY17-19F EPS fall by 4.9-8.7% to reflect lower earnings contribution from Aoxin and Aidite, post their spin-offs.
  • Maintain Reduce with a slightly higher TP of S$0.61 (28x P/E) as we roll forward our valuation to end-CY19F.

Leading private dental healthcare provider across Asia

  • Q&M Dental Group is a leading private dental healthcare provider with presence across Singapore, Malaysia and China. It offers quality services at competitive pricing, and boasts of a wide network of clinics at strategic locations.
  • In Singapore, it operates 72 dental clinics, four medical clinics and an aesthetic centre, supported by over 230 qualified dentists. Based on over 300k patient visits a year, Q&M commands c.9% market share of the overall Singapore dental healthcare market.
  • The group also owns nine dental clinics and a dental supplies and equipment distribution company in Malaysia, as well as a dental clinic in China.

Extracting value from spin-offs

  • In Jul 2014, Q&M bought a 60% stake in Aoxin, a Liaoning-based primary dental care group with over 20 years of operating history. The company was subsequently spun off onto the SGX Catalist board in Aug 2017, as Aoxin Q&M Dental Group, thus reducing Q&M’s stake to c.44%. Aoxin Q&M Dental Group targets acquisitions of large dental hospitals and further penetration into north eastern China.
  • In 2014 , Q&M also purchased a 51% stake in Aidite, a dental company specialising in dental crown manufacturing based in Hebei Province, China. The company was also listed on the China New Third Board in Dec 2016, resulting in the dilution of Q&M's stake to c.38%.
  • Q&M had engaged in both spin-offs, hoping to fetch higher valuations, and provide different listing platform to raise funds for more aggressive growth.

Maintain REDUCE with S$0.61 Target Price

  • We cut FY17-19F EPS by 4.9-8.7% as we factor in earnings dilution from the spin-off of Aoxin and Aidite. But our target price inches up slightly to S$0.61 as we roll forward our valuation to end-CY19F, still pegged to 28x P/E (1 s.d. below its historical 5-year mean).
  • We keep Q&M at REDUCE despite its recent share price correction, as the stock still looks expensive given the single-digit EPS growth over FY18-19F. The stock also offers 1.4 – 1.7% FY17-19F dividend yield.
  • The company commissioned a strategic review of its businesses, which was completed on 7 Aug 2017 but did not yield any outcome. We expect Q&M Dental to retain its existing M&A strategy to grow earnings, especially in tier 2 and 3 Chinese cities.
  • Downside risks include unfavourable regulatory changes in China and poor M&A execution, while earnings-accretive acquisitions could catalyse the stock.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-01-07
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.61 Up 0.600