20181119-辉立证券-Dialling_back_our_growth_expectations_8页_808kb

Q & M Dental Group Summary

Core Content

Q & M Dental Group (QNM SP) is a healthcare company primarily operating in Singapore, Malaysia, and China. The company's performance for the third quarter of 2018 (3Q18) and the first nine months of 2018 (9M18) showed mixed results, with revenue growth slowing and the company downgrading its stock rating to NEUTRAL.

Main Points

Revenue Performance

• 3Q18 Revenue: S$29.5 million, showing a flat YoY growth of 0.2%.
• 9M18 Revenue: Only met 59% of FY18e estimates due to lower-than-expected revenue from clinics.
• Clinics Revenue: Increased slightly by 0.4% YoY to S$27.7 million, but growth was muted due to government tightening of CHAS (Community Health Assist Scheme) and Pioneer Generation claim limits.
• Distribution Revenue: Declined by 2.8% YoY to S$1.8 million, attributed to reduced private sector purchases in both Singapore and Malaysia.

Profitability

• PATMI (Profit After Tax and Minority Interest): 70% of FY18e estimates for 9M18, driven by margin expansion.
• Gross Margins: Improved to 89.0% for the third quarter, with clinic margins at ~93% and distribution margins at ~30%.
• Core EBITDA: Remained stable at S$4.4 million, with EBIT rising by 8.6% YoY to S$6.1 million.

Operational Expansion

• Clinics Expansion: Total dental clinics expanded by 3 YoY, with 93 clinics as of 3Q18. The company signed agreements for 3 new clinics in Singapore and 4 in Malaysia.
• Expansion Plans: Aggressive expansion plans for 2018 were likely to fall short due to a more moderate pace of clinic expansion and reduced patient claims.

Financial Position

• Net Debt: Increased to S$63.1 million, up from S$52.6 million a year ago, mainly due to share buybacks and dividends.
• Debt Composition: Majority of debt comes from a S$59.9 million three-year term loan.
• Cash Flow: Cash flow from operations was S$15.3 million in 3Q18, down from S$18.9 million in 3Q17. Net change in cash was negative at S$9.3 million for FY18e.

Key Information

Company Structure

• Dental Outlets: 72 in Singapore, 16 in Malaysia, and 1 in PRC.
• Medical Outlets: 4 in Singapore.

Valuation

• Target Price: S$0.51 (downgraded from S$0.65).
• PER (Price-to-Earnings Ratio): Reduced to 25x from 27x, aligning with peers' average.
• P/BV (Price-to-Book Value): 3.3x for FY18e, down from 4.9x in FY15.
• Dividend Yield: 2.5% for FY18e and FY19e.
• EPS (Earnings Per Share): Adjusted to S$1.92 for FY18e and S$1.97 for FY19e.

Financial Highlights

• Revenue: S$121.8 million for FY18e, down from S$154.9 million in FY15.
• EBITDA: S$22.6 million for FY18e, down from S$43.4 million in FY15.
• Net Profit, Adjusted: S$15.3 million for FY18e, with a slight increase in FY19e to S$15.7 million.
• ROE (Return on Equity): 14.0% for FY18e, down from 27.4% in FY15.
• ROA (Return on Assets): 7.6% for FY18e, down from 12.7% in FY15.

Outlook and Investment Action

• Downgrade to NEUTRAL: Due to a more moderate pace of clinic expansion and reduced CHAS claims.
• Re-rating Catalysts: Potential for successful earnings accretive acquisitions and better-than-expected results from associates.
• Expansion Plans: The company is focusing on regional expansion in Singapore and Malaysia to compensate for the loss of revenue from China, where Aidite and Aoxin were deconsolidated.

New Business Opportunities

• Education Sector: Q&M is preparing to be accredited by CPE as a teaching college for dentistry, anticipating new regulations from the Ministry of Health (MOH).
• Artificial Intelligence (AI): Experimenting with AI to improve dental processes, including X-ray and mouth cavity scans for treatment planning.

Market Performance

• Stock Price: Last close at S$0.500, with a forecast dividend of S$0.012 and a total return of 5.1%.
• Price vs. STI: The stock's performance is closely monitored against the Straits Times Index (STI).

Valuation Ratios

• P/E (Price-to-Earnings): 25.0x for FY18e, 25.3x for FY19e.
• EV/EBITDA: 22.7x for FY18e, 22.4x for FY19e.
• Net Debt / (Cash): 48.7x for FY18e, 45.0x for FY19e.
• Net Gearing: 40.3% for FY18e, 35.3% for FY19e.

Summary

Q & M Dental Group experienced a slowdown in revenue growth due to reduced patient claims and lower private sector purchases, leading to a downgrade to NEUTRAL. Despite these challenges, the company maintained improved gross margins and is exploring new opportunities in education and AI. The financial position shows an increase in net debt, but the company is focusing on regional expansion and potential acquisitions to drive future growth. The stock's valuation ratios suggest a more conservative outlook compared to previous years.