Q&M Dental Group -
Share Price: SGD0.36
Target Price: SGD0.48
Almost a done deal
■ We believe Q&M is likely to be close to completing its acquisition of Aoxin, its largest purchase in China to-date.
■ We include a 21% proforma EPS uplift from Aoxin into our TP, which is raised by 20% to SGD0.48. Maintain BUY.
■ We expect more acquisitions to come that could further re-rate the stock.
Largest-ever acquisition should be nearing completion
We believe Q&M should be close to completing its acquisition of Aoxin Stomalogical, its largest purchase in China to-date. In our initiation note on 1 Oct 2013, we said Q&M is expected to wrap up the deal by end-Feb 2014. According to Q&M, the management company that will hold the assets of Aoxin’s founder, Dr Shao, and Q&M’s China WOFE (Wholly Owned Foreign Enterprise) that will own 60% of this management company have been incorporated.
Barring last-minute, deal-breaking disagreements, the acquisition should be done by the original deadline of end-Feb 2014.
We would stick to this timeline, although we would not discount the need for an extra month. Having said that, an extra month’s delay will not significantly impact our forecasts. To recap, Aoxin is a group of four dental hospitals and three dental clinics in Liaoning Province, China. It is highly profitable (28% FY13 net margin vs only 8% for Q&M) and Q&M will be paying less than 10x FY14 earnings for a minimum profit guarantee of SGD2.2m for 12 years.
Raising target price to account for Aoxin’s proforma profit
Since we initiated coverage on Q&M at SGD0.305, its share price has risen to SGD0.36 now. ADTV has also improved. With the acquisition of Aoxin likely nearing completion, we factor in a proforma 21% EPS uplift from Aoxin into our target price, which is subsequently raised to SGD0.48 from SGD0.41 (still based on a P/E of 34x FY14E core earnings, 0.5 standard deviation below its 5-year historical mean of 38x).
Publish date: 13/02/14