Listing gain to lift FY17F EPS but recurring profit from Aoxin and Aidite to shrunk c.26% post spin-offs. After spin-off listings, its China subsidiaries will be reclassified as Q&M’s associates. Instead of receiving 60% of Aoxin’s profit and 51% of Aidite’s, Q&M will now recognise c.44% of Aoxin’s profit and subsequently c.38% of Aidite’s profit.
Clinic business is the sole growth engine post spin-offs. Management noted that it will step up its expansion plan for Clinic business, given the headwinds in its Distribution business in Malaysia. Distribution business in Malaysia was hit by lower demand and weakening MYR, which lifted its costs of sales. The Group recorded c.S$2mn impairment of Goodwill in view of the slowdown in its Distribution business in Malaysia.
Focus on organic growth in its Clinic business. Investment thesis of low dentist-to-population ratio in Singapore remains intact. Key under-served areas identified are West and North areas of Singapore. It targets to open three new clinics in Singapore by 1H FY2017. However, patient demand under CHAS and Pioneer Generation subsidies could be dampened by government’s tighter claim limits this year. Q&M had been a beneficiary of this government initiative.
Q&M is in a net debt position of S$40.4mn, and 18.4% of its total debt (amounting to S$15.5mn) will be expiring in FY2017. While the Group has S$44.1mn cash as at 31 December 2016, it intends to refinance these loans to fund its accelerated expansion.
Downgrade to ‘Reduce’ rating with lower TP of $0.65 (previously S$0.89) based on unchanged 38.2x FY17F PER. We adjusted our forecast FY17 EPS lower by c.28% to 1.69 Singapore cents after accounting for (i) lower FY17F revenue growth expectation, and (ii) c.26% loss of profit from Aoxin and Aidite. Our FY17F EPS excludes gain on spin-off of Aoxin and spin-off listing cots. Potential re-rating catalysts would be (i) the Group stepping up its pace of acquisitions or picking up favourable deals; and (ii) to revive its businesses in Malaysia.
Spin-offs and listing of Aidite and Aoxin
Valuation of Aidite doubled. The 51% stake in Aidite was acquired at an implied PER of 10x. The 12.83% stake was spun-off with $S21.327mn gain, implying 21.1x PER based on Aidite’s $7.882mn FY2016 profit.
The 60% stakes of Aoxin was acquired with an implied PER of 11x, and we expect the higher valuation of Aoxin post spin-off listing. The recent listing of healthcare service providers on SGX-Catalist Board are Singapore O&G Ltd. and HC Surgical Specialists Ltd. They were listed at a valuation of 12.8x and 12.5x PER, respectively.
The successful spin-offs of Aidite and soon, Aoxin, will be a testament of the Group’s strategy of identifying, acquiring and realising value from business with great potential. Management shared their intention to replicate such model, which would add new growth driver to the Group before spinning it off and unlocking value to Q&M’s shareholders.
Unlikely to see higher dividend payout ratio or special dividend in FY17F.
FY2016 payout ratio was 31% as compared to FY2015’s 57%. We expect the Group to reinvest most of the gains from spin-off listing into its robust expansion projects. We maintained our assumption that the Group will payout 60% of its FY17F earnings (exclude gains from spin-off).
Margins to return to pre-FY2014 level, i.e. before acquisition of Aidite and Aoxin.
FY2016 Distribution gross profit margin was compressed by higher cost of sales for Shenyang Maotai. Distribution margin shed 6.1 percentage points (“pps”) to 28.7% in FY2016 compared to a year ago. We think it could stabilise at c.35% after the spin-off listing of Aoxin.
FY2015: Full year contribution from Aidite and Aoxin (both acquired in mid-FY2014)
FY17F onwards: Higher gross profit margin without adverse impact from China’s cost pressure and better procurement process, as well as improved economies of scale
Valuations
Q&M Dental Group is currently trading at 20.1x trailing PER, which is below the peers’ average PER at 37.3x. It also has higher than peers’ average return on equity (ROE). These are distorted by the S$21.2mn gain from spin-off of Aidite, the S$1.1mn spin-off related costs and the S$4.1mn impairment of Goodwill.
Excluding all non-recurring items, FY16F EPS would have been 1.53 cents, implying TTM PE multiple of 46.2x. A high c.24% premium to peers’ 37.3x PER.
Q&M has been trading on a high PER (5-year average PER at 41.8x) as it had been gaining ground in China dental market via acquisitions. However, we think that such high premium to its peers are now unjustifiable after Q&M spin-off listing its China businesses and no longer have significant control over them.
As such we maintained PER multiple at 38.2x FY17F PER, which is in line with peers’ average FY17F PER of 38.4x.
Figure 4: Peers Comparison
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Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.
She graduated with a Bachelor of Science in Mathematics and Economics from NTU.
