Q&M Dental Group

Kim Eng on 27 Feb 2014

Below expectations due to one-off costs
Q&M’s FY13 net profit of SGD5.2m (+3.4% YoY) was below our expectations for SGD5.6m due to higher start-up and acquisition-related costs in 4Q13. More importantly, FY13 and 4Q13 revenue grew strongly by 25% and 31% YoY respectively. The increase in full-year revenue was driven by the opening of new outlets in Malaysia and Singapore, and the acquisition of AR Dental Supplies in 3Q13.

The real story will play out in China this year
In our view, future growth will be acquisition-driven and will come from China. The latest development is the signing of a binding agreement to buy Qinghuangdao Aidite (Aidite). This will be Q&M’s second-largest proposed acquisition to date after Aoxin Stomatology Group (Aoxin). Adding in Aoxin (to be completed soon) and Aidite, we expect EPS growth to ramp up to 84% in FY14E (27% from the existing business, 29% from Aoxin and 28% from Aidite). Organically, we expect Q&M to achieve 27% EPS growth as its new outlets in Malaysia and Singapore move past their gestation phase and newly-acquired AR Dental Supplies start to contribute a full year’s profit (vs six months in FY13).

Completion of Aidite deal will lift TP to SGD0.54
For now, we maintain our TP at SGD0.48 (which includes Aoxin’s 9 nine month earnings contribution since the acquisition is largely complete). But if both Aoxin and Aidite were factored into our FY14E forecasts, it would raise our target price to SGD0.54, thus justifying the 34x P/E multiple we have used to arrive at the SGD0.54 all-in value. Note that at 34x, this is still 0.5 standard deviation below Q&M’s historical mean since Dec 2009.