Q&M remains our top small/mid-cap healthcare pick. Valuations are less demanding following the vendor sale selldown. Growth opportunities are still present. Q&M has half its MTN issue left and management tells us targets are now knocking on its doors instead.
Over the past two months, the group has spent ~S$51m (60:40 cash:shares) to acquire S$3.8m of earnings potential (implying 13x P/E). This, together with earnings from Aoxin and Aidite, will support our projected EPS CAGR of 31% over FY15-17. Maintain Add, with an unchanged target price of S$0.97 (41x CY16 P/E, still based on the 5-year average 12m-forward).
#1 in Singapore
With the acquisition of nine dental clinics in Singapore over the past two months, Q&M has further enhanced its position as the largest dental group in Singapore (10% of dental clinics and 12% of registered dentists). We note the concerns and limitations surrounding growth prospects in Singapore. However, we believe there is room for further consolidation given the highly-fragmented dental market in Singapore. After Q&M, the next three biggest players form ~7% in total and the rest of the market is made up of either small networks (no more than 10 clinics) or standalone clinics.
Going forward, we think the prospects look even brighter. Our expectation for the Singapore dental market is this: 1) clinics in their ‘prime’ are the most attractive targets for Q&M, 2) older dentists/dental clinics will eventually phase out, and 3) younger dentists will be drawn towards working for bigger and more established chains, more so as patient volumes gravitate towards the larger chains (compensation is a function of patient volume) and economies of scale make it unenviable to start your own clinic. Furthermore, anti-competition laws are unlikely to arise until the largest player commands 40% market share.
We remind investors there is upside potential as we have factored in YTD acquisitions at their profit targets/guarantees. These only form the baseline and it is not unreasonable to anticipate some outperformance.
Update on MTN issue
Q&M still has ~S$29.6m of the initial S$60m cash remaining from its MTN issue. We are also projecting an additional ~S$14m of cash proceeds in 2Q15 from the sale of its Jurong Gateway property. As at 1Q15, Q&M had a net gearing of 0.01x. We anticipate more acquisitions. (Read Report)