Above expectations. Following an above-expectations 3Q13 results (NP +52% YoY and 72% QoQ to SGD1.5m, above our forecast of SGD1.2m), we have nudged up our FY13 forecast by 6%. At 54 dental clinics in Singapore and a strategy of mixing dental outlets with new revenue generators such as medical specialists, Q&M has reached critical mass where new outlets will not impact profits as significantly as before. Hence, 3Q13 results showed a spike normally associated with the seasonally stronger 4Q. Catalysts include a better 4Q and the smooth progress of the China acquisitions. As the only covering broker, maintain BUY with a SGD0.41 TP, based on 34x FY13F forecast or 0.5SD below historical mean.

Critical mass showing through. A positive surprise was that the opening of new outlets did not drag down earnings as much as expected, mainly because existing outlets contributed more. Of the 3Q13 YoY revenue increase of SGD4.4m, 56% came from existing outlets while 19% came from new outlets. We estimate this was more than enough to offset the cost of adding a new medical specialty clinic (respiratory & gastroenterology). The last 24% came from an acquisition in Malaysia (70%-owned AR Dental).

Upside surprise potential awaits in 4Q. 9MYTD net profit made up of 65% of our forecasted net profit. Historically, 4Q makes up 35% of full year profit as customers tend to use up their company-provided entitlements then. We raise FY13F forecast by 6% but maintain our FY14F earnings as we have already incorporated better margins.

China acquisitions proceeding smoothly. The proposed acquisitions of Aoxin Dental Group and Dr. Sun’s Hospital in Liaoning province have passed the first stage of due diligence. If the second stage (which is expected to take 3 weeks) also goes well, Q&M will then sign a binding framework and set up a joint venture company with the Chinese owners to facilitate incorporation. The target is still to complete by Feb 2014.

Get invested. We see Q&M now reaping the benefits of having expanded its network to a critical mass which now sees gestation for each new clinic shortened to just 6 months from a year previously. Further, the addition of general and specialist medical services will complement its dental revenue with minimal bolt-on risks. Lastly, the proposed acquisition of two dental businesses in China can be expected to boost FY14F earnings by another 39% beyond our current forecast and bring valuation down significantly to below 20x.  

Source: Maybank Kim Eng Research - 13 Nov 2013