Still room for growth
- 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.
Forgotten upside
- 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.
Source: http://research.itradecimb.com/
