Q&M Dental Group - CGS-CIMB Research 2021-08-16: Give Me A Share Of That; Aoxin Q&M To Acquire 49% Of Acumen Diagnostics

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Q & M DENTAL GROUP (S) LIMITED (SGX:QC7)

Q&M Dental Group - Give Me A Share Of That; Aoxin Q&M To Acquire 49% Of Acumen Diagnostics

• Q&M Dental Group's associate Aoxin Q&M has proposed to acquire 49% of Acumen Diagnostics. Purchase consideration is S$29.4m via issuance of new ordinary shares.
• Post-acquisition, Q&M Dental Group will hold a ~33% effective stake in Aoxin Q&M (vs. 44% now). Acquisition to be completed within six months of announcement date.
• We estimate ~8% FY22F EPS accretion as this should support Aoxin Q&M’s turnaround (from FY20 net loss of RMB12m). Reiterate ADD on Q&M Dental Group at target price S$0.97.

Proposed 49% acquisition of Acumen Diagnostics

• On 16 Aug 2021, Q&M Dental Group (SGX:QC7)’s ~44%-owned associate Aoxin Q&M (SGX:1D4) proposed to acquire a 49% stake in Acumen Diagnostics, Q&M Dental Group’s 51%-owned testing services subsidiary.
• The acquisition will be conducted via allotment and issuance of new ordinary shares, with an expected purchase consideration of S$29.4m. The per-share consideration of S$0.231 represents a 38% premium to VWAP of S$0.168 on 13 Aug 2021.
• The acquisition implies a P/E of ~3x, which looks attractive to us.
• After completion, Q&M Dental Group’s effective stake in Aoxin Q&M will be ~33%, down from its current 44% stake.

Accelerating Aoxin’s turnaround

• At end-FY20, Aoxin Q&M recorded a net loss of RMB12m (vs. RMB14m in FY19). In 1H21, Aoxin Q&M’s net loss came in at RMB6m (vs. RMB10m in 1H20).
• In our view, Aoxin Q&M’s return to profitability is around the corner given continued strong demand for testing services in Singapore, which should support FY22F net income.
• We expect Aoxin Q&M’s share of Acumen earnings at S$10m in FY22F (~Rmb47m), which should contribute positively to PBT.
• See Aoxin Q&M's share price; Aoxin Q&M's announcements.

~8% FY22F EPS accretion for Q&M, valuation gains are a boost

• Post-acquisition, Q&M Dental Group will hold a ~33% stake in Aoxin Q&M (vs. 44% currently). New contribution from Aoxin Q&M should raise Q&M Dental Group’s associate results by ~S$3m. This indicates FY22F EPS accretion of ~8%.
• As of announcement date (16 Aug 2021), the preliminary valuation of Acumen stands at S$60m. Recall that on 3 July 2020, Q&M Dental Group acquired a 51% stake in Acumen for S$3m (implied valuation of ~S$6m). This represents a potential valuation gain of ~S$28m to be recognised.
• We view the acquisition favourably given the cheap purchase consideration and positive contribution to Aoxin Q&M via high-margin testing.
• See
  • Q&M Dental's Share Price,
  • Q&M Dental's Target Price,
  • Q&M Dental's Analyst Reports,
  • Q&M Dental's Dividend History,
  • Q&M Dental's Announcements,
  • Q&M Dental's Latest News.
• We reiterate our ADD call on Q&M Dental Group with a target price of S$0.97, based on 20x FY22F P/E (~25% discount to peers in view of smaller market cap). We are monitoring developments in the transaction.
• Downside risk is lower-than-expected testing numbers.

Kenneth TAN CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-16

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