Q&M Dental Group

Kim Eng on 8 Jul 2014

• Deal completed. Largest acquisition so far, Aoxin Stomatology now part of Q&M China. Maintain BUY, TP SGD0.55.
• Aoxin-style earnings-accretive acquisitions are what to expect. We expect more such deals in the pipeline.
• When acquisitions fully kick in next year, FY15E P/E valuation will be reduced from 37x to as low as 27x.

What’s New
Q&M has successfully completed the acquisition of a 60% stake in Aoxin Stomatology Group in Shenyang, Liaoning province, its largest acquisition in China to-date. With this, the stock has almost recovered back to its placement price of SGD0.48 to Heritas Helios Investments in early June. We maintain BUY with SGD0.55 TP.

What’s Our View
Aoxin will be earnings accretive as its acquisition valuation of 11x P/E is far below Q&M's P/E of 43x FY14E core earnings. Based on the first year profit guarantee of RMB6.6m pa, Aoxin is expected to contribute a prorated SGD1m to FY14E net profit - in line with our expectations. The full impact will come in FY15E when it contributes SGD1.5m on top of the current forecasted net profit. Q&M’s FY14E and FY15E P/Es of 43.4x and 37.3x look expensive now because we have not yet included contributions from any acquisition in the pipeline in our forecasts, be it Aoxin or five other M&A deals that have been announced. We will be adjusting them to include Aoxin when 1H14E results are released, as we expect to have its full proforma figures by then.

Based on our estimates, FY15E P/E will be reduced from 37.3x now (42.3x if rights issue included) to 35.8x (with Aoxin) and as low as 27.1x (all-in). At the same time, FY15E EPS growth is expected to rise from 16.3% (organic growth only) to 23.6% (with Aoxin) to as high as 53.5% (all-in). With Aoxin in the bag, Q&M has proven that it is able to execute on its acquisition strategy, and with a string of deals to come, the stock is still attractive in the next 12 months.