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Broker's take: CIMB warns of M&A risks as Q&M takes on another China buy


CIMB Research this week cautioned that Q&M Dental Group's latest acquisition could take longer than expected as the dental chain has yet to conclude five deals announced between 2014 and 2015.

The group this week said it plans to acquire a 47.14 per cent stake in Shenzhen New Perfect Dental Research for 66 million yuan (S$13.8 million).

"The acquisition is consistent with Q&M's inorganic growth strategy and intention to build its franchise in China," said CIMB Research in a report, noting that Q&M currently generates an estimated 40 per cent of its earnings from China, with the rest out of Singapore.

"We think the longer-term strategy for the company will be to derive the majority of its earnings from China, which it sees as the engine for growth, especially given that Q&M is already the largest private dental chain in Singapore and is likely to see its domestic growth plateau."

But CIMB highlighted that this acquisition would lift the group's net gearing to 0.39 times from 0.26 times as at end of Q1 2016.

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"Completion of the deal could take longer than expected - Q&M has yet to conclude five deals announced in 2014-15 and has also terminated deals," it said. "Upside risks include smooth M&A execution."

CIMB raised the target price to S$0.74 from S$0.70 on FY17-18 earnings estimates, but kept its "hold" rating on the stock. The target price represents a premium to healthcare services peers' price-earnings (PE) ratio of 20 times, reflecting Q&M's "dominant domestic position and growing overseas presence". But it translates to a slight discount to larger established hospital groups' PE ratio of 37 times.

Shares of Q&M Dental were unchanged at S$0.76 as at 11.23am.

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