Friday, 21 March 2014

Q&M Dental Group

UOBKayhian on 21 Mar 2014

VALUATION
  • Q&M Dental Group Singapore (Q&M) is trading at 2013 PE of 37.4x. This is in comparision to its historical average PE (since it listed in 2009) of 39.1x. and industry-average FY14 PE of 29x. Based on Bloomberg, the consensus 12-month target price for the stock is S$0.45.
INVESTMENT HIGHLIGHTS
  • Riding on the growth of CAD/CAM dentistry which involves computer-aided design and computer-aided manufacturing (CAD/CAM) in the fabrication of dental prostheses such as crowns. The technology significantly reduces the length of time needed to design and create a prosthesis (from 1-2 weeks down to an hour), improving convenience and simplicity for practitioners and patients alike. Management estimates higher fees from the use of such technology. A regular crown procedure could go as high as S$800-1,200 with the use of CAD/CAM technology as compared to the usual price of S$600-800.
  • MOU to acquire 51% of dental ceramics manufacturer, Qinhuangdao Aidite High Technical Ceramic Co., Ltd (Aidite), in China. Aidite manufactures zirconium oxide (a type of dental ceramic) blocks which are used in CAD/CAM to fabricate prostheses. Management rationalises that a strategic investment in the consummable ensures more stable demand while allowing it to take an indirect exposure to CAD/CAM. The Rmb80m (S$17m) deal comes with an annual profit guarantee of Rmb15m-30m and total dividends of at least Rmb159m (S$33m) over 12 years (2014-25) to the group.
  • Proposed acquisition of 100% of a dental clinic, Foo & Associates Pte Ltd, located at Orchard Road, Singapore. Q&M intends to have Dr Foo Mooh Thong, an expert in CAD/CAM technology, spearhead the group’s expansion into this field. The S$5.5m deal includes an annual profit guarantee of at least S$525,000 over 10 years.
  • In talks for 6 dental hospitals in China as part of Q&M’s overseas expansion plan. The group intends to take 50-60% stakes in hospitals that are located in tier-2 cities. If successfully completed, we estimate the total investment could amount to Rmb155m (S$31m) with a total profit guarantee of Rmb230m (S$46m) over a 12- year period. The group also continues to increase their clinic count in China through acquisitions and JVs. With the abovementioned transactions in the pipeline, management thinks its net profit in 2014 could reach double-digit figures.

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