• FY17 Revenue was in line with our full year expectation; FY17 Earnings missed by 9% on lower than expected results from associates
• Intensive organic growth: targets 10 new clinics each in SG and MY by end-FY18e
• Declared final dividend of 0.42 cents and a special dividend of 0.5 cents (Full year dividend of 1.62 cents +44.6%YoY)
• Maintained NEUTRAL and slightly higher TP at S$0.63 (previously S$0.61), based on higher estimated 2.3 cents FY18 EPS and lower 27x FY18e PER

The Positive

+ One-time gain of S$17.4mn from the spin-off of Aoxin (Apr-17). Both Aidite and Aoxin have been reclassified from subsidiaries to associates, contributing $$3.95mn or 27.2% to the Group’s FY17 adjusted PBT. The Group declared final dividend of 0.42 cents and, to our surprise, a special dividend of 0.5 cents.

+ Higher and sustainable gross profit margin, in the high-80s or low 90s. Gross margins for respective business segments have reverted to their pre-acquisition levels – Clinic margin at c.93% and Distribution margin at c.30%.

+ Refinancing and disposal of underperforming clinic could save an aggregate amount of S$2mn moving forward.

1. The Group has secured S$60mn bank facility as at 25 Jan-18 to repay the 4.4% MTN due on 18 Mar-18. The favourable interest rate (below 4.4%) led to lower annual interest payment.
2. Sold Q&M Medical Aesthetic & Laser Centre Pte. Ltd. on 4 Dec-17 for a total consideration of S$0.24mn, to cut losses.  

The Negative

• Dental equipment and supplies distribution business turned red. The segment recorded an EBIT loss of S$165,000 as compared to profit of S$141,000 in FY16. The new Productivity Solutions Grant (PSG) announced in 2018 Singapore Budget, could help support demand for new dental equipment.

Outlook

Outlook brightens but concerns remain. Post-deconsolidation of its major revenue drivers in China, the Group is stepping up its regional expansion in Singapore and Malaysia to plug the gap.

1. Intensive organic growth of its dental clinics in Singapore. Net decrease of 1 dental outlet and 1 aesthetic centre in Singapore in FY17. Targets to add another 10 clinics into its network by end FY18e (+13.5% more outlets).
2. Restarting the engine in Malaysia. Net increase of 8 dental outlets in Malaysia in FY17. Targets to add another 10 clinics into its network by end FY18e (+71.4% more outlets). Potential locations are Johor and Malacca, where spending power of the residents are rising and density of dentists are lower compared to Kuala Lumpur.

Despite the step up in its expansion strategy – from its previous target of opening at least 5 new clinics per year – we are lukewarm on the organic growth strategy in Singapore as compared to Malaysia’s.

1. While the dentist density in Singapore is lower that the developed countries, namely, US, UK, and Japan, we expects slower momentum from organic growth as the market becomes saturated.
2. Lacklustre demand for dental services. Outpatient load in Singapore’s Dental Clinics (both public and private) was flattish at +0.3% YoY in 2017. We have yet to see any sign of recovery in late 2017.

The Group has earmarked c.SS$4mn for FY18e CapEx (capital expenditures). Notwithstanding that, we do not discount the possibility that the Group will expanding into Southern China via joint ventures and organic growth initiatives with its Chinese associate, Aoxin Q&M Dental Group. Aoxin Q&M Dental has a strong presence in the Northern China.

We expect the Group to fund its expansion via its existing cash balances of S$37mn and/or debt. The Group has recently established a S$500mn Multicurrency Debt Issuance Programme in Dec-17. It also generates over SS$10mn net operating cash flows annually.

With lower cash balances and EBITDA, the Group has bumped up its net gearing ratio from 0.35x to 0.42x, and interest coverage ratio dipping from 12.7x to 9.5x as at end-FY17.

Maintained Neutral with slightly higher TP of S$0.63 (previously S$0.61)

We raised FY18e EPS by 12.3% to 2.3 cent, after taking into account of the targeted 20 new clinics in Singapore and Malaysia. While, in general, we expect local patient demand for healthcare services to recover in 2018, the Group no longer have significant control over its Aidite and Aoxin after the spin-offs. We lowered PER from 32.0x to 27.3x, which is in line with peers’ average FY18e PER.

Potential re-rating catalysts would be (i) successful earnings accretive acquisitions; and (ii) better-than-expected results from associates.