Heritas Helios Investments’s decision to take a 10% stake in Q&M at market price underscores its confidence.

Vendor share sale, mainly from Quan Min Holdings. With sale, moratorium and service agreements extended.

Ample M&A-driven upside; China business IPO a major catalyst. Maintain BUY with an unchanged TP of SGD0.55.

What’s New

Q&M has attracted the attention of a long-term healthcare investor, Heritas Helios Investments (HHI). HHI will end up with a 10% equity stake, paying SGD0.48 per Q&M share. The stake will come from existing shareholders Quan Min Holdings, Dr Kelvin Koh and Dr Felicia Koh. HHI has also been granted a two-year call option to buy additional 63m new Q&M shares at a minimum exercise price of SGD0.48. As a key condition of this transaction, key shareholders have agreed to extend their moratorium and service agreements by three years to Jan 2021. HHI is the healthcare private equity (PE) arm of IMC Group, a diversified group with interest in shipping, logistics, healthcare, oil & gas and real estate with strong presence in China, Singapore and Malaysia.

What’s Our View

This is the first investment by a major PE fund in Q&M. The fact that HHI is willing to pay full market price, achieved prior to last Thursday’s trading halt highlights the confidence it has in Q&M. Going forward, we expect earnings to be driven by: 1) organic growth in both Singapore and Malaysia, and 2) a major M&A-led push into the high growth China dental market. The potential for a highly-valued listing of its businesses in China within the next two years would be a major positive. This transaction reinforces our optimism on Q&M. We reiterate our BUY call with TP of SGD0.55, based on 39x FY14E earnings, after incorporating proforma contributions from the acquisitions of Aoxin Stomatology Group and Qinhuangdao Aidite.  

Source: Maybank Kim Eng Research - 27 May 2014