Q&M Dental Group - Not pretty but we let it go for now

■ 3Q15 earnings made up 23% of our full-year forecast while 9M made up 63%, which we deem in line as newly-completed acquisitions will contribute more in 4Q.

■ Topline growth slowed (+7.6% yoy vs. average of +31% since 2012), which would have been flat if not for acquisitions.

■ Organic growth can no longer be taken for granted and our EPS cuts reflect this, but acquisitions completed in FY15 will help drive growth.

Maintain Add; further M&A and outperformance of profit targets the key catalysts.

3Q15 spells limited organic growth
We believe Q&M’s 3Q15 results indicate challenging market conditions. There was topline growth but it was weaker than before (+7.6% yoy vs. average of +31% since 2012) and if we excluded timing differences from new acquisitions, we think topline growth would have been flat. Net profit did grow 16.7% yoy to S$2.7m but this was shored up by a S$0.55m PIC cash payout, excluding which earnings would have dipped 6.8%.

Single-digit topline growth the new norm?
Single is the new double. Q&M’s core dental and medical clinic segment (~78% of group revenue) reported 6% topline growth in 3Q, with the bulk of growth attributed to newlycompleted acquisitions. This is in contrast to the 17-32% yoy growth reported since 1Q12. The clear slowdown is not exclusive to Q&M and other healthcare companies are also reporting single-digit topline growth. Having said that, we project double-digit growth in 4Q15 as newly-completed acquisitions contribute one full quarter.

Recent downward profit revisions indicative of a weaker climate?
Targets are either becoming tougher negotiators or are less confident of their business outlook. TP Dental’s 20% profit guarantee downward revision has set a worrying precedent and it appears others are asking for similar discounts. Most recently, its Aesthetics Dental acquisition was also completed with a 20% downward revision in profit, albeit with an extra 2 years added to the service contract. Nevertheless, at the lower profit numbers, these acquisitions still imply attractive valuations of 12-18x P/E.

M&A still in play
Following major acquisitions in 2H14 (Aoxin and Aidite), 2015 followed a similar theme. The group still has ~S$26m left untapped from its S$60m MTN issue and we believe Q&M will remain active on the M&A front. Delays in the due diligence process and downward revisions to initial agreements do not give us confidence. Risks, therefore, include the timing and price of new deals.

Technical Analysis
Daily Chart
Maintain Add, with M&A as the key re-rating catalyst
We think growth will be mostly driven by acquisitions. We cut our FY15-17 EPS by 1- 14% as we lower our organic growth assumptions in view of weaker market conditions and downward revisions to profit targets. Our target price is cut to S$0.84 as we roll forward with a lower P/E multiple of 34.5x (1 s.d. below historical average of 41x but still above peers) vs. 41x previously. Maintain Add, with further M&A and outperformance of profit targets the key catalysts. (Read Report)

Read Related Report
1) Q&M Dental Group - Strong delivery; expect more to come by Maybank Kim Eng Research, published on 17 November 2015

Source : CIMB Research

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