Q & M Dental Group - CGS-CIMB Research 2019-06-10: Teething Problems At A Cost


Q & M Dental Group - Teething Problems At A Cost

  • Q & M Dental Group's 1Q19 core net profit of S$2.8m (-27.9% y-o-y) missed our FY19F forecast due to higher staff costs and lower associate profits.
  • Slow execution on new Singapore/Malaysia clinics and zero China M&As are the reasons why we dislike the stock.
  • We cut our FY19-20F EPS by 23.9-25.7%; maintain REDUCE on steep FY20F P/E valuation (25% above industry average) and lacklustre earnings growth.

1Q19 core net profit down 27.9% y-o-y, below our full-year forecast

  • Q & M DENTAL GROUP (S) LIMITED (SGX:QC7) reported 1Q19 core net profit of S$2.8m, representing only 17% of our full-year forecast.
  • The 27.9% y-o-y decline in 1Q19 bottomline was attributed to higher staff costs and lower associates’ contribution; excluding associate profits, 1Q19 core net profit would have decreased by 11.3% y-o-y.
  • 1Q19 topline rose marginally by 4.2% y-o-y on the back of higher sales from Singapore dental outlets, and Malaysia’s dental distribution business.

Underperforming associates

  • 1Q19 saw associates’ profit contribution of S$0.5m, as compared to S$1.3m in 1Q18 (4Q18: S$1.4m). An expanded R&D workforce led to lower profit from Aidite (delisted from China’s third board), while 42.6%-owned Aoxin Q & M Dental Group (SGX:1D4) (AOXIN SP, Not Rated) faced gestation losses from new hospitals/clinics. Aidite plans to bring its products to bigger overseas markets.
  • We expect the associates’ underperformance to last for a few more quarters.

Execution falls short of ambitious plans

  • The group intends to add at least 10 clinics each in Singapore and Malaysia in 2019F. YTD, Q & M Dental Group has opened 1 clinic in Singapore and 3 in Malaysia, with 1 and 6 other locations secured, respectively.
  • We think Q & M Dental Group is on track with its expansion plans in Malaysia, and any meaningful earnings contribution would be more visible from FY20F, after the clinics ramp up (c.2 years on average to break even at net profit level).

China expansion held back by North-South restriction

  • In 2015, Q & M Dental Group traded above 50.5x forward P/E (1 s.d. above 6-year historical mean of 41.5x) for its China exposure after the acquisitions of Aidite (specialised dental ceramics manufacturer) and Aoxin Q & M Dental Group (primary dental care company with 4 hospitals and 7 centres) in 2014.
  • But this quickly dissipated upon plans to spin off both entities, exacerbated by a lack of China acquisitions as Q & M Dental Group faces challenges in finding suitable opportunities in the southern People’s Republic of China due to its non-compete clause with Aoxin.

Maintain REDUCE on lower FY19-20F EPS

  • We cut our FY19-20F EPS to reflect the disappointing 1Q19 results and near-term expansion costs, and introduce our FY21F forecasts.
  • Given that Q & M Dental Group’s biggest presence is in Singapore/Malaysia and its lacklustre earnings growth, we think its current valuation of 29.2x FY20F P/E is expensive.
  • Maintain REDUCE with a lower Target Price of S$0.40, pegged to 23x overall industry average.
  • Upside risks: faster M&As and narrowing of start-up losses.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-10
SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 0.40 DOWN 0.470