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Why Are Q & M Dental Group (Singapore) Limited’s Shares Halted from Trading? Is The Company Planning Its Next Big Move?

Q & M Dental Group (Singapore) Limited (SGX: QC7) announced last Friday that it might be considering a possible spin-off of its subsidiary, Q & M Aidite International Pte Ltd, through an initial public offering.

Then just this morning, Q & M Dental had requested for a trading halt, citing the “pending release” of an announcement.

Q & M Aidite is a company based in China which focuses on the manufacture of zirconium oxide blocks. Zirconium oxide blocks are one of the main materials used in the fabrication of dental prosthesis including dentures, crowns, and bridges.

According to a dental professional I had spoken to, zirconium oxide blocks are generally considered as a commodity product as both patients and dentists do not generally take into account the brand of the zirconium oxide blocks used when they make dental-treatment decisions. In most cases, it is left to the dental laboratory to decide where it sources its zirconium oxide blocks from.

According to Q & M Dental’s announcement, the company’s board of directors sees the proposed spin-off of Q & M Aidite as a good way to access the public market for the capital needed to invest more into the capital-intensive manufacturing business.

Based on my personal analysis, the proposed spin-off should also benefit Q & M Dental’s shareholders. This is because the company would not need to tie down its own capital to help grow the manufacturing business.

Instead, Q & M Dental can use its funds to invest into other areas that might bring higher returns on investments for its shareholders as compared to the commodity-like zirconium oxide manufacturing business.

Q & M Dental has aspirations to become the “leading dental healthcare group in the region.” In line with its ambition, the company has already established a presence in recent years in Malaysia and China.

But, its geographic expansion has come at a cost to shareholders: Q & M Dental has seen its return on equity drop from 26.3% in 2009 to just 14% in 2014.

With a spin-off of Q & M Aidite, Q & M Dental might be able to reverse that downward trend by plowing more capital into dental clinics instead of into a manufacturing business.

Based on my interview with the aforementioned dental professional, a well-run clinic can recover its cost of investment well within two years and generate a return on equity of close to 50%. Thus, Q & M Dental might be able to generate much higher returns for its shareholders if it focuses on expanding its clinics-based business around the region.

Foolish Summary

As of the time of writing (4:15pm), there is still no additional announcement from Q & M Dental regarding Q & M Aidite. It’d be interesting to see if the former will be releasing more information about the proposed spin-off.

Q & M Dental is currently trading at a lofty price to earnings ratio of 65.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any companies mentioned above.