Q&M Dental Group

Maybank Kim Eng Research, Oct 1

WE initiate with a S$0.41 target price, which implies 34 per cent upside (pegged at 34 times FY2014 forecast PE, a 28 per cent discount to its global peers and 0.5 standard deviation below its historical mean), but there is potential for greater growth potential and target price upside if its acquisition strategy bears fruit, especially in China.

Q&M has proposed to acquire two dental groups in China, its largest acquisitions to-date. If done before end-FY2013, Aoxin Stomatological (Dr Shao's hospitals) and Dr Sun's hospitals in Liaoning province can be expected to boost FY2014 earnings and our target price by 39 per cent and 37 per cent respectively (from S$0.41 to S$0.56) ...

Successful acquisitions will boost China's profit contribution from just one per cent now to 28 per cent by FY2014. Q&M has plans to unlock the value of its China operations via an IPO in Hong Kong or China when the time is right, but already private equity firms have sniffed the investment potential and are circling. Kunwu Jiuding's proposed purchase of a 20 per cent stake for 200 million yuan places a value of one billion yuan (S$200 million) on Q&M's China operation, higher than Q&M's entire market cap in Singapore.

In our view, Q&M is the rarest gem in the global dental sector - the best-performing by margins, ROE and growth in a sector where only four listed peers can be found, but the cheapest. This scarcity value and strong balance sheet make Q&M itself ripe for acquisition. At 34 times FY2014 forecast, we believe Q&M is still undervalued now ...

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