Can Q & M Dental Group (Singapore) Limited Sustain Its Acquisition Strategy?

Q & M Dental Group (Singapore) Limited (SGX: QC7) has been one of the fastest-growing companies listed in Singapore. Its revenue has been growing at 19.3% annually between FY2006 to FY2014.

After its IPO in late 2009, the company has also achieved strong earnings per share growth for shareholders. Its earning per share has increased about 13% annually from FY2010 to FY2014. This track record of growth has encouraged the market to rate the company at 46 times earnings.

However, is this valuation justified? Can Q & M Dental Group continue its strong growth into the future?

The Conglomerate Bubble of the 1960’s

Q & M Dental Group seems to be focusing on acquisition as a strategy to grow its business. In FY2014 alone, Q&M Dental acquired:

  1. 60% stake in Aoxin Stomatology Group
  2. 51% stake in Qinhuangdao Aidite High Technical Ceramic
  3. 70% stake in NG GK Dental Surgery
  4. 100% stake in Foo $ Associates

And the company is not slowing down on its acquisition spree this year at all. It has announced that it has acquired the following companies just recently.

  1. TP Dental Surgeons Pte Ltd.
  2. Tiong Bahru and Bright Smile Dental Clinics
  3. Aesthetics Dental Surgery

What is worrying for investors is that Q&M Dental is issuing new shares as currency to finance the purchases of companies in some cases. This reminds me of the conglomerate bubble that happened during the late 1960’s in the US market.

What happened then was that many conglomerates realised that they can artificially boost their earnings per share by acquiring companies that are trading at a lower multiple.

For example, if a conglomerate is trading at 20 times its price-to-earnings ratio, it can use its shares as a currency to acquire another company with a price-to-earnings ration of only 10 times. Consequently, the company could boost its earnings per share, even if it issued shares to acquire the target company, entirely.

As a result, many conglomerates became reckless on just acquiring companies with a lower multiple, instead of looking at the target companies’ business fundamental. And when these target companies were not able to sustain their earnings later on, the earnings of the conglomerate fell and damaged the whole market.

A hint of similarity

In a way, what is happening in Q & M Dental seems quite similar to the boom-and-bust of conglomerates. As minority shareholders, we can only trust that the management is purchasing good companies that can continue to grow their businesses in a sustainable manner.

However, there is no way for us to know for sure the quality of the businesses being merged into the group. Should these target companies turned out to be sub-par businesses in the future, the price to that Q & M Dental’s shareholders could pay might be huge.

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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.