Q & M Dental

[mikh]

Does anyone follow this company? At first glance it looks like a nice business standing together with the likes of Raffles Medical and Healthway.

The chain has a significant number of dental outlets in Singapore but still at much less than 50%, with room to grow some more. It's outlet at City Square is huge.

Q&M is expanding into China where the number of dentists per population is much lower. It also bought into a denture producer paving the way for cost competitiveness. I visited JB across the causeway and found only 1 dentist in the main city area.

Dentistry offers a nice niche healthcare area and quite profitable, as i am given to understand. Q&M's stock price just leaped recently.

(not inducement to buy or sell)

[Nick]

At the moment, Q&M is trading at a market capitalization of $146 million. It generated $2 million profit with equity of $24.8 million in 1H 2010 report. In my opinion, prospective investors are paying a lot for potential growth. Even if the earnings do manage to double to $8 million a year, its PER will still stand at a whooping 18 times ! If it fails to succeed in doubling or even tripling its earnings, can its share price be sustained at such levels ? A case of good company but poor share price ?

Perhaps, prospective shareholders may wish to look at the company right below it in the SGX 'Q' page - Qualitas. It is another medical stock with dental chain in Singapore and Australia. It has a market capitalization of $25.6 million. It generated $1.6 million profit with equity of $28.0 million. Pretty similar results to Q&M !

Both companies have expanded regionally, deal in similar industries, launched M&A activity over the past year, have similar profitability and size - yet the market capitalization are worlds apart.

I am not saying Q&M is not as good as Qualitas or vice versa. I believe there is a reason for the two different rating and a prudent investor should find out why before deciding whether does the price justify such a rating. I merely find it interesting that 2 companies with pretty similar results could trade at such extreme differences. Merely an academic interest so Q&M supporters - don't fire me haha !

(Not Vested in any health care stock)

[mikh]

Thanks for sharing about Qualitas, Nick. It could be an interesting company.
It is a M'sian based company listed on Catalist. Main footprint in M'sia with more than 100 primary care clinics there. It first expanded into Singapore in end of 2009 with 1 dental clinic. For FY2009, its dentistry business accounted for slightly more than 10% of total revenue. In end 2010 it acquired another 5 dental clinics in Singapore. (It also has some emerging Indian and Aus business). As pointed out, it seems to have decent profits and appears that it must have found Singapore and the dental business attractive enough to acquire some more. Interesting that a GP chain is going into Dentistry in a foreign country. Good to watch for its end year report.

In comparison, Q&M (mainboard) is basically all dentisty with some 40 clinics in Singapore. It seeks to expand in China and has entered into JVs there in Nanjing, Shenzhen. Like many companies going to China it is seeking to increase its profits multi-fold. Indeed the Shenzhen PRC deal provides dividend expectation SD1.9 annually for 10 years under a profit guarantee arrangement.

I suppose Q&M has been higher rated due to the China glamour and more hope, ambition. Qualitas has been low key, on Catalist and less exciting.

(not vested in either Qs, sniffing around)

[Nick]

Both Q&M and Qualitas have been expanding their businesses regionally though the former is concentrating primarily in China (like HW).

Another small cap local medical counter is SG Medical which deals with eye care, sports health etc in Singapore. It recently signed an agreement to develop a hospital in Mongolia. It currently trades at a market capitalization of $33.5 million. It reported earnings of $1.7 million for 1H 10 with equity of $6.2 million. It has a decent dividend history.

I think that's all for the small cap medical counters. Only 3 listed here. Similar profitability but world's apart in valuation

[Jon-san]

Potential takeover targets then?

[Nick]

It is quite hard to say.

At a glance, I don't think their businesses do have a very high barrier of entry. Any would-be competitor would find it cheaper to simply build it up from scratch than to acquire an existing rival at a premium. Is it really difficult to lease a clinic and rope in a few doctors ? I say this because branding is a non-issue in any of these companies (unlike Thomson or RMG).

On the flip side, I don't foresee the possibility of earnings or cash-flow deteriorating either since the demand is real. But growth potential - that remains to be seen. Pretty interesting proposition.

Then again, this represents my own POV which may be fatally flawed. Please share your views

(Not vested in any health-care stock)

[mikh]

Both Q&M and Qualitas have been expanding their businesses regionally though the former is concentrating primarily in China (like HW).

Another small cap local medical counter is SG Medical which deals with eye care, sports health etc in Singapore. It recently signed an agreement to develop a hospital in Mongolia. It currently trades at a market capitalization of $33.5 million. It reported earnings of $1.7 million for 1H 10 with equity of $6.2 million. It has a decent dividend history.

I think that's all for the small cap medical counters. Only 3 listed here. Similar profitability but world's apart in valuation

Rather than go OT, i created a thread on Sg Medical and posted my note here.
http://www.valuebuddies.com/thread-707.html

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It is quite hard to say.

At a glance, I don't think their businesses do have a very high barrier of entry. Any would-be competitor would find it cheaper to simply build it up from scratch than to acquire an existing rival at a premium. Is it really difficult to lease a clinic and rope in a few doctors ? I say this because branding is a non-issue in any of these companies (unlike Thomson or RMG).

On the flip side, I don't foresee the possibility of earnings or cash-flow deteriorating either since the demand is real. But growth potential - that remains to be seen. Pretty interesting proposition.

Then again, this represents my own POV which may be fatally flawed. Please share your views

(Not vested in any health-care stock)

I think that for the healthcare sector, key factors to consider would be specialization, scale, government, personnel.

Not all specializations are profitable and they face different demand. Specialization enables scale and the provision of higher end more complex services that simple clinics cannot easily duplicate. In Sg as in many countries, this is a key sector and a public service with lots of room for market interference and imperfection. The govt produces the key manpower, can greatly influence the market, regulate it as well as compete against it, or assist it (think medical tourism, physiotherapists vs chiropractors). A the end of the day, the highly personalised service can only be provided by highly paid individuals who are never enough in supply. This is balanced against "virtually bottomless" demand and great difficulty in assessing quality of service rendered.

Considering these for the different healthcare players listed would give us a better insight on their value.

my 3 cents

[RBM]

Q&M Dental shares are up ~ 11% in the last 5.1/2 trading sessions. Yesterday and today the trading volumes have been unusually high. As of noon today, Wednesday 11th January 2011, over 9.1/2 million shares have been traded with the last done deal at S$ 0.855. I have no idea what is driving this recent (heavy volume) spurt.

To my mind Q&M is an interesting counter to consider. It is very focused on Dentistry - unlike some other medical counters listed on the SGX, Q&M very much "stick to their knitting", avoiding fragmentation across various medical dicsiplines. I see Q&M as rather recession-proof - are you going to defer a cavity-filling because the SGX is down 20%? I don't think so. And their figures on repeat customers are very positive. Q&M's China entry is focused on a huge potential growth market - the proportion of PRC people who visit a dentist is an order of magnitude less than say in Western Europe .... and somewhat less than Singapore.

The P/E is an eye-watering 50'ish and the dividend yield is < 1.5% .......... but by investing into this one you are buying into a very focused niche player with a rather compelling growth story ........... on which Q&M Management seems to be delivering so far.

Vested.
RBM

[dzwm87]

Q&M Dental shares are up ~ 11% in the last 5.1/2 trading sessions. Yesterday and today the trading volumes have been unusually high. As of noon today, Wednesday 11th January 2011, over 9.1/2 million shares have been traded with the last done deal at S$ 0.855. I have no idea what is driving this recent (heavy volume) spurt.

To my mind Q&M is an interesting counter to consider. It is very focused on Dentistry - unlike some other medical counters listed on the SGX, Q&M very much "stick to their knitting", avoiding fragmentation across various medical dicsiplines. I see Q&M as rather recession-proof - are you going to defer a cavity-filling because the SGX is down 20%? I don't think so. And their figures on repeat customers are very positive. Q&M's China entry is focused on a huge potential growth market - the proportion of PRC people who visit a dentist is an order of magnitude less than say in Western Europe .... and somewhat less than Singapore.

The P/E is an eye-watering 50'ish and the dividend yield is < 1.5% .......... but by investing into this one you are buying into a very focused niche player with a rather compelling growth story ........... on which Q&M Management seems to be delivering so far.

Vested.
RBM

It's trading at 54x P/E!! Most of the other blue chips are not trading at such a high P/E, do they?

At such valaution, won't it be a little too expensive? The only catalyst is on growth, with no other positive indicators. A quick check has shown that directors or SSH have no increase in insider stake. Public only holds 27.12% - that may explains the lack in insider stake buying; they might as well buy abck the company. What will be the driver for growth apart from clinic expansions in China? Is dental a rising trend in China now? Maybe a casual interview with your dentist during the enxt dental appointment might give a clearer picture about the industry!

They do have a strong balance sheet but judging from the business, it is quite normative to have such a balance sheet strength. Do you have any other comparable peer to measure again?

Keep us updated! Interesting company to understand

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An article on Q&M was posted on Next Insight:

Next Insight's Q&M Article

[RBM]

As I said in my earlier message of this afternoon, Q&M's historical P/E is indeed eye-watering and if dividend yield is a key driver for you, then Q&M certainly isn't your stock. But three anecdotal points regarding Q&M are worth consideration (i.e. in addition to a strong balance sheet)..........

a) Q&M have 400,000 patients in Singapore today - something like 18% of patients who regularly visit a Singapore dentist are Q&M clients - and they are on track for a further 50% increase in their number of clinics in Singapore in the coming years.
b) They have a stated aim to IPO their rapidly expanding China business before end 2016.
c) Group revenues have increased >50% in the period H1 2008 to H1 2011. To keep overheads under control Q&M they are going for larger clinics in Singapore.

I do not know of a comparable peer, i.e. a listed company in Asia Pacific so focused on the dental business. At the time of going in I did look at other SGX listed medical companies but with the exception of Raffles Medical, I found them either unfocussed/fragmented (e.g. SG Medical) or unprofitable or with very limited growth prospects. I also missed the boat on a few acquisitions: (i) Parkway, (ii)Qualitas, mentional earlier in this chain, and moreover (iii) Thomson Medical.

As a postscript to my earlier message, Q&M's share price closed up S$ 0.02 at S$ 0.85 today. I still do not know what has driven its Scents 8 increase in the last six trading sessions. But I'm not complaining.

........... and I always laugh to myself when I see Q&M's logo!

Vested,
RBM