Wednesday 2 July 2014

Q&M Dental

Kim Eng on 2 Jul 2014

  • The rights issue price of SGD0.10/rights share is very attractive, in our view. Maintain BUY.
  • Beyond the six announced acquisitions, there could be more acquisitions coming that will offset the near-term dilution.
  • Remain positive on Q&M’s vision to grow via (1) earnings-accretive acquisitions in the China dental market and (2) organic expansion in Singapore and Malaysia.
What’s New
Q&M has announced a 1-for-5 rights issue to raise SGD14.1m via the issuance of up to 140.5m new shares at SGD0.10/rights share. Major shareholders including Quan Min Holdings and the CEO Dr Ng, holding a combined 65.2% stake, have agreed to take up their rights entitlements. Dr Ng will also subscribe for any excess rights shares (up to 61.5m or 43-50% of the total rights shares).

What’s Our View
The rights issue price is very attractive given the stock’s outperformance since we initiated in late 2013 and the expected positive contributions from Q&M’s China acquisitions. The major shareholders’ decision to fully subscribe for their allotments is also a strong endorsement of the stock. We expect the funds raised to be used to complete the acquisitions of Aoxin and Aidite.
There will some near-term earnings dilution but this will be compensated by maiden contributions from its six proposed acquisitions. Based on the last closing price of SGD0.455, the theoretical ex-rights price will be SGD0.40. Our TP will be diluted from SGD0.55 to SGD0.455 post rights issue but we are sanguine on this as it is based on FY14E forecasts which do not fully factor in acquisition-related contributions and it still represents more than 10% potential share price upside.
We would remain buyers of Q&M as the full year impact from the acquisitions will be felt only in FY15E. Lastly, beyond the six announced acquisitions (five in China, one in Singapore), there could be more EPS-accretive acquisitions in the future.

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