• Q&M to buy upmarket dental clinic, TP Dental Surgeons Pte Ltd, for S$28.6 mn
• Deal favorable as purchase estimated at 15.1x P/E, lower than Q&M’s 47.7x
• We expect more acquisitions by end-2015
• Reiterate Accumulate with higher TP of S$0.92

What’s in the news?

Moving upmarket – Q&M proposed to buy TP Dental for S$28.6 mn in cash and shares (cash: S$18 mn, shares: S$10.6 mn). The consideration shares are priced at S$0.71 each (10% discount to 24 Apr-15’s weighted average price). We are confident on the deal and estimate it would go through by end Jun-15.

Established name in Singapore – TP Dental was founded in 1973. Its clinic is located on 26 th floor of Ngee Ann City, away from public view. As such, it relies on referrals. Most of their clients reside in Singapore, of which 60% are local and 40% are expat. The clinic has 18 rooms spanning 10,000 sqf. It is expanding by another 1,000 sqf comprising three more rooms. Renovation works are expected to finish by end-2015. We expect a 10% increase in revenue and net profit in FY16F as a result.

Key personnel retained – TP Dental’s key dentist, Dr. Hwang Yee Cheau, owns 51% of TP. She would be getting 75% of the deal (S$21.4 mn: S$10.8 in cash, all of the shares). She would sign a 10-year service agreement as part of the deal. The four other selling shareholders have signed 5-year service agreements as well. We are positive on this as it demonstrates commitment from TP Dental’s dentists towards Q&M’s success.

Attractive acquisition valuation – In FY13, it had revenue and net profit after tax of S$12.4 mn and S$1.9 mn. With a deal size of S$28.6mn, this implies a P/E of 15.1x. This is favorable when compared to Q&M’s 47.7x and healthcare peers’ average of 42.5x.

Profit target – If the deal goes through, TP Dental has to meet a profit target of S$4 mn every two years, for eight years. Dr. Hwang will extend her service agreement by one year for every missed target. We view this as a safety mechanism for Q&M.

How do we view this?

We are overall positive on the purchase. TP Dental offers better net margin of 15% vs Q&M five-year average of 9.3%. We also see potential synergy as Q&M can refer its clients to TP Dental for more specialised services and procedures.

We think that Q&M is still on the look out for acquisition opportunities. Following the purchase of TP Dental, It would have S$42mn left from the S$60 mn of its MTN programme issued on 19 Mar-15. We estimate it would be used by end-2015.

On an all-cash basis and using TP Dental valuation multiple as a guide (2.3x Price-torevenue), we estimate a potential 22.1% increase in FY16F EPS via acquisitions. However, there may be a drag on FY15F EPS depending on the timing of the deals. As such, we base our valuation on a 75:25 mix of FY15F/16F EPS.

Investment Actions

We maintain our Accumulate rating with a higher TP of S$0.92.

Source: Phillip Securities Research - 29 Apr 2015