Does Q & M Dental Group (Singapore) Limited’s Latest Acquisition Make Sense?

Last week on 28 January 2016, Q & M Dental Group (Singapore) Limited (SGX: QC7) announced a proposed acquisition of Lee & Lee (Dental Surgeons) Pte Ltd for S$10 million.

Lee & Lee Dental is one of the leading dental surgeries practice in Singapore with a 32-year history. The company currently has three practices located around Singapore.

Q & M will be funding S$5.13 million of the acquisition with cash. The remaining S$4.87 million would be paid for by Q & M issuing 6.76 million new shares of itself at an issue price of S$0.72 each. The issue price is at an 11% premium over the S$0.65 closing price of Q & M’s shares on 28 January 2016.

Before the proposed acquisition, Q & M Dental had about 787 million shares outstanding. Therefore, the 6.76 million shares that would potentially be issued if the deal goes through would represent dilution of existing shareholders’ stakes of just 0.86%.

The four current shareholders of Lee & Lee Dental – who are dentists – have each agreed to sign service agreements ranging from 10 years to 12 years with Q & M Dental Group. Moreover, they have also agreed to a profit guarantee clause which would see Lee & Lee Dental needing to meet certain profit targets every two years for the next twelve years.

The profit target for the first two year block (from 1 January 2015 to 31 December 2016) would start at S$1.435 million. In other words, Q & M Dental is expecting Lee & Lee to generate at least S$0.7175 million per year in profit in 2015 and 2016. Thus, Q & M Dental is essentially valuing Lee & Lee Dental at 14 times its 2016 earnings (S$10 million divided by S$0.7175 million).

Foolish Summary

Although it might seem like Q & M has paid a steep valuation for an unlisted dental practice, the acquisition would strengthen the market leadership position of Q & M Dental in Singapore. At the moment, Q & M Dental already has the largest network of private dental outlets here.

A number of conditions have to be fulfilled before the deal can be completed, one of which is that Q & M Dental has to be satisfied with Lee & Lee Dental’s business after a due diligence exercise has been complemented. Q & M currently trades at a share price of S$0.655 and is valued at nearly 40 times its trailing earnings.

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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.