Q&M Dental Group's proposed acquisition of 60% in Smilebay Dental Surgery enables it to enter the Penang market for cosmetic dentistry, orthodontics, periodontics, dental implants and general dental treatments, thereby strengthening its foothold in Malaysia.
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Maybank Kim Eng analysts: John Cheong and Gregory Yap
» Proposed acquisition of six dental clinics in Penang for SGD4.4m, at 13.7x forward P/E.
» Profit guarantee of SGD0.32m pa, with 5% CAGR for the next 12 years. Raise FY16-17 EPS by 1.3-1.5%.
» Maintain BUY with catalysts expected from more acquisitions. Lift target price by 1% to SGD1.02, still at 45x FY16 EPS.
Enhancing presence in Malaysia
Maybank Kim Eng analyst John CheongQ&M is acquiring 60% of the Smilebay group of dental clinics in Penang, Malaysia for SGD4.4m. 63% of the consideration will be in the form of cash, with the rest in new shares issued at SGD0.72.
This 6-clinic dental group, founded by Dr Yong Peng San in 1999, marks Q&M’s first venture into the state of Penang in Malaysia. The acquisition will increase its network of dental clinics in Malaysia to 14, up from 8 previously (Johor, KL and Malacca).
Q&M and Smilebay intend to tap on each other’s expertise and strengths to further penetrate the Malaysia market.
Eight senior dentists have signed 6-12 year service agreements.
Raise EPS by 1.3-1.5%
Based on the 12-year profit guarantee, the acquisition is expected to contribute at least SGD320,000 a year in earnings to Q&M, with 5% CAGR, from FY16 onwards. This assumes the deal completes before the end of FY15. We raise FY16-17 EPS by 1.3-1.5%.
Maintain BUY; catalysts from more acquisitions
Maintain BUY with target price lifted to SGD1.02 from SGD1.01 after our EPS changes. This is still at 45x FY16 EPS, 1SD above its 5-year mean to capture Q&M’s strong earnings trajectory, consistent M&A track record and the scarcity value of healthcare plays with its unique business model.
We understand that there are more opportunities knocking on Q&M’s door, following its strengthened M&A track record and enlarged network.
With SGD26m of cash remaining from its recent MTN issue, we expect more acquisitions that could potentially boost FY16-17 EPS by another 15-18%.
