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Analysts mixed on Q&M Dental as core dental business outlook remains uncertain

Bryan Wu
Bryan Wu11/18/2022 03:32 PM GMT+08  • 5 min read
Analysts mixed on Q&M Dental as core dental business outlook remains uncertain
Q&M has opened 16 new dental clinics ytd, and is expected to open two more clinics in 4QFY2022 to bring its total new clinics for FY2022 to 18.
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Analysts from CGS-CIMB Research, DBS Group Research and PhillipCapital are mixed on Q&M Dental Group, and have maintained their “add”, “hold” and “buy” recommendations following the group’s results for the 3QFY2022 ended Sept 30.

CGS-CIMB’s target price (TP) stood at 45 cents, up slightly from its previous target price of 44 cents. DBS, on the other hand, lowered its target price to 40 cents from 53 cents previously. PhillipCapital also lowered its target price to 52 cents, down from 60 cents previously.

For analysts Tay Wee Kuang and Kenneth Tan of CGS-CIMB, they believe that Q&M’s core dental revenue growth is “commendable”, with the company’s 3QFY2022 revenue in line on resilient sales momentum but profits missed as losses from diagnostics arm Acumen and higher finance costs weighed in.

They add that they expect Q&M’s core dental revenue to remain “seasonally strong” in the upcoming 4QFY2022 as employees use their corporate or individual dental benefits before they expire by the year-end.

“We also expect some revenue recognition from Q&M’s tender award to operate one of the Joint Testing and Vaccination Centre (JTVC), which commenced operations on Oct 1,” they write.

“We expect net profit to improve [around] 55% y-o-y in 4QFY2022 from lower staff costs as staff bonus for FY2022 had been accrued since 2QFY2022 compared to FY2021 when it was solely recognised in 4QFY2021,” they add.

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Further to their report, Tay and Tan note that Q&M is unlikely to hit its annual target of 30 new clinics by end-FY2022. The group opened five new dental clinics, four in Singapore and one in Malaysia, in 3QFY2022, bringing the group’s total dental clinic count to 152 clinics compared to 128 clinics in 3QFY2021.

“Q&M has opened 16 new dental clinics year-to-date (ytd), and is expected to open two more clinics in 4QFY2022 to bring its total new clinics for FY2022 to 18, shy of its 30 new clinics target set previously,” the analysts write.

“Nevertheless, we understand that the management is considering increasing dental chairs in existing outlets to serve its growth ambitions as leases for new locations increase,” they add.

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The analysts’ new TP of 45 cents is based on 20x FY2024 price-to-earnings ratio (P/E), 1 standard deviation (s.d.) below the five-year mean. They believe Q&M’s valuations remain attractive at 17x its forward P/E.

However, according to Tabitha Foo and Paul Yong of DBS, a slowdown in the dental business is to be expected. Their new TP of 40 cents is based on 18x FY2023 P/E for its core dental business or 0.75 s.d. below the five-year historical average.

Foo and Yong say this is due to a larger-than-expected impact of reopening of borders on top-line growth, a longer-than-expected gestation period for new clinics, higher labour costs and the uncertain macroeconomic outlook. They have cut their FY2022 to FY2024 earnings by 22% to 26%.

They believe that valuations are fair for now at 16x FY2023 P/E, 0.85 s.d. below its five-year historical average. “As we project it will take a few years for Q&M’s bottom line to reach FY2020 levels, valuations seem aligned with its fundamentals currently. The stock could re-rate if the group can deliver better-than-expected earnings from its core dental business,” explain the analysts.

Foo and Yong are remaining conservative on the core dental business while awaiting the ramp-up in profitability for the new clinics. “While Acumen Diagnostics recently won a Singapore Ministry of Health (MOH) tender for a JTVC, we note that the value of the contract is just [around] 2% of FY2023 revenue, which does not move the needle. We will watch for upside in this segment in the upcoming quarters.”

Meanwhile, PhillipCapital’s Paul Chew believes that the company’s expansion costs will start to “bite”.

Despite the number of clinics in Singapore expanding by almost 18% to 106, Chew says revenue growth has been muted. “The re-opening of borders has shifted spending towards other discretionary spending. There were also disruptions in patient visitations and nurse availability from the recent surge in Covid-19 cases,” he says.

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Chew notes that net profit from core dental operations declined 17% y-o-y to $4.2 million, with the record expansion of 24 clinics in Singapore and Malaysia over the past 12 months also a burden on profitability in the near term. Considering the additional start-up cost of new clinics and expenditure in the development of AI dental-guided software, he believes FY2022 is an “investment year” for Q&M.

He expects FY2023 to be a recovery year for the company as new clinics mature and contribute to earnings. Chew’s new TP of 52 cents values Q&M’s core dental operations at 25x P/E FY22 earnings.

Positively, Chew notes that the franchise is still expanding and that there has been a “change in strategy” in clinic openings. “The priority is to fill existing capacity in current clinics before new locations are open. Other efforts are to build larger dental centres where profitability is higher from economies of scale,” he adds.

As at 2.19pm, shares in Q&M Dental Group traded flat at 33.5 cents with a dividend yield of 9.65%.

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