Share price: SGD0.305
Target price: SGD0.41 (new)
A Gem In More Ways Than One
Initiate with BUY, TP of SGD0.41. Going to the dentist is no longer the horror experience it used to be. In fact, more and more people are going for regular dental visits, which is why we like Singapore dental player Q&M’s growth prospects, especially on the regional front. We initiate with a SGD0.41 TP which implies 34% upside (pegged at 34x FY14F PER, a 28% discount to its global peers and 0.5 standard deviation below its historical mean) but there is potential for greater growth potential and target price upside if its acquisition strategy bears fruit, especially in China. From a dominant position at home, it is expanding into China and Malaysia via acquisitions, both small and large.
Major China acquisitions will be a huge catalyst. Q&M has proposed to acquire two dental groups, China, its largest acquisitions to-date. If done before end-FY13, Aoxin Stomatological (Dr Shao’s hospitals) and Dr Sun’s hospitals in Liaoning province can be expected to boost FY14 earnings and our target price by 39% and 37% respectively (from SGD0.41 to SGD0.56). Dental businesses in emerging markets such as China show far more earnings growth and margin potential than dental players in developed markets. Due to rising affluence and safety concerns, a strong brand name is very valuable in China.
Private valuations higher than public valuations. Successful acquisitions will boost China’s profit contribution from just 1% now to 28% by FY14. Q&M has plans to unlock the value of its China operations via an IPO in HK or China when the time is right, but already private equity firms have sniffed the investment potential and are circling. Kunwu Jiuding’s proposed purchase of a 20% stake for RMB200m that places a value of RMB1b (SGD200m) on Q&M’s China operation, higher than Q&M’s entire market cap in Singapore.
Rarest gem in global dentistry. In our view, Q&M is the rarest gem in the global dental sector – the best-performing by margins, ROE and growth in a sector where only four listed peers can be found but the cheapest. This scarcity value and strong balance sheet makes Q&M itself ripe for acquisition. At 34x FY14F forecast, we believe Q&M is still undervalued now ahead of (1) organic profits from new dental outlets and a new revenue stream from medical clinics in Singapore and Malaysia expected to kick in in FY14, and (2) a successful conclusion to upcoming China acquisitions that will rewire its growth map toward emerging markets with even more growth potential.
Publish date: 01/10/13