SINGAPORE (March 3): CIMB has downgraded its rating on Q&M Dental Group from “hold” to “reduce”, lowering its target price on the stock to 60 cents from 77 cents on growing concerns about the group’s continued earnings disappointments and goodwill impairment.

Although Q&M closed FY16 with earnings of $28.3 million, which was more than double that of $11.4 million a year ago, analyst Jonathan Seow underscores the group’s core net profit as “a big miss” as it formed only 79% of CIMB’s full-year forecasts.

“4Q/FY16’s 761%/148% reported net profit growth was inflated, mostly lifted by a $21.3 million gain from the spin-off of Aidite. This is a non-cash gain, essentially arising from a mark-to-market accounting treatment,” says Seow in a report on Thursday.

He adds that the group’s total dividend per share of 1.12 cents, while higher y-o-y, is “hardly anything to shout about”.

(See also: Q&M Dental full year earnings more than double to $28.3 mil on one-off gain)

“While we exclude goodwill impairment when arriving at our core earnings and note that this is a non cash treatment, we are nonetheless worried that this could be an early red flag. Furthermore, relative to the group’s FY16 core net profit of $11.8 million, the $4.1 million goodwill impairment is no small sum,” notes Seow.  

Q&M’s goodwill impairment of $4.1 million during the recent financial year is half-related to Q&M’s Malaysian equipment and supplies distribution business. The other half is related to the group’s acquired dental businesses in Singapore.

On the other hand, the analyst believes the group’s strategic review of its business could be related to a potential takeover offer “in a blue-sky scenario”, which could lend share price support and hence pose a risk to CIMB’s downgrade.

(See also: Q&M Dental Group undertakes strategic review of business)

“Currently trading at 36x CY17 P/E, the stock was not priced to disappointment. Upside risks include higher-than-expected realised gains from Aidite’s spin-off,” he concludes.  

As at 11.21am, shares of Q&M are trading at 71 cents.