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Q&M Dental Group Summary

Core Content

Q&M Dental Group (QNM SP) is a healthcare company based in Singapore with a current share price of SGD0.36 and a market capitalization of USD172 million. The company is expected to complete its largest acquisition in China, Aoxin, which is projected to provide a 21% proforma EPS uplift. This has led to an increase in the target price to SGD0.48, representing a 33% upside from the current price. The report also mentions the possibility of additional acquisitions that could further re-rate the stock.

Main Points

• Acquisition of Aoxin:

  • Expected to be completed by end of March 2014.
  • Includes 4 dental hospitals and 3 clinics in Liaoning Province, China.
  • Aoxin has a higher net margin (28% in FY13) compared to Q&M (8%).
  • Q&M will pay less than 10x FY14 earnings for a 12-year profit guarantee of SGD2.2 million.

• Target Price and EPS Growth:

  • Target price raised to SGD0.48 from SGD0.41, based on a P/E of 34x FY14E core earnings.
  • If all four acquisitions are completed, the target price could reach SGD0.53, or a 47% upside.
  • Aoxin alone is expected to lift FY14E EPS growth to 21%, while combined with other acquisitions, it could reach 31%.

• Share Price Performance:

  • The share price has increased by 4.3% in the last month, 18% in the last three months, and 10.8% in the last year.
  • The company has a 23% free float and 605 million issued shares.

• Acquisition Pipeline:

  • Aoxin (Dr. Shao): 60% stake, expected completion by end of March 2014.
  • Dr. Sun: 60% stake, expected completion by May 2014.
  • Qinghuangdao Aidite High Technical Ceramic: 51% stake, expected completion by May 2014.
  • Rongcheng City Shidao Hospital: joint venture with Dr. Shao, expected completion by May 2014.

• Valuation Metrics:

  • Current FY14E core EPS is 1.18 SGD cts.
  • Current P/E is 30.2x, while the core P/E is 30.2x.
  • P/BV is 4.8x.
  • EV/EBITDA is 20.5x, expected to drop to 17.5x by FY15E.

• Catalysts:

  • Continued collaboration with Dr. Shao for future acquisitions.
  • Access to China's universal health insurance system, which is a major draw for Q&M's expansion.
  • Potential for additional EPS growth from other acquisitions and improved operations.

Key Information

• Acquisition Impact: Aoxin is expected to significantly boost Q&M's financials, with a 21% EPS uplift.
• Profit Guarantee: Q&M will receive a guaranteed profit of SGD2.2 million for 12 years from the acquisition of Aoxin.
• Share Issuance: Additional shares may be issued to finance acquisitions, with different assumptions on the mix of cash and shares.
• Market Position: Q&M is currently trading below its 52-week high of SGD0.37 and low of SGD0.28.
• Peer Comparison: Q&M is compared to other healthcare and dental companies in terms of P/E, P/BV, and EPS growth, showing it is currently trading at a lower valuation than some peers.

Financial Forecasts

Conclusion

Q&M Dental Group is positioned to benefit from its acquisition of Aoxin and potential other deals, which could significantly improve its earnings and valuation. The company's strategic focus on expanding its presence in China, particularly through the universal health insurance system, is a key driver for future growth. The report maintains a "BUY" rating, indicating strong confidence in the company's future performance and potential for further re-rating.