CGS-CIMB Research analysts Lim Siew Khee, Cezzane See and Kenneth Tan have initiated “add” on Q&M Dental Group with a target price of 92 cents, representing a 42.6% upside on the counter’s current price of 65 cents.

The way the analysts see it, the group’s core dental business is “almost recession-proof” after it saw FY2020 revenue and core profit climb 8% and 45% y-o-y respectively, even without the aid of government grants provided.

Furthermore, it expects Q&M to “mark record profits” from FY2021 onwards driven by its “robust dental outlet expansion and earnings contribution from its new Covid-19 testing segment”.

SEE:Q&M Dental Group sees 10% growth in FY20 earnings to $19.7 mil; group revenue surpasses pre-Covid-19 levels

“The stock trades at around 14 times FY2022 price-to-earnings (P/E) or -2 standard deviation of its historical average (since listing). The valuations are also below its pre-China growth phase trading band of 30x in 2009-2013,” writes the team in a March 9 report.

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“Our target price is pegged at 20.0 times FY2022 earnings per share (EPS), a 25% discount to peers for its smaller market cap. We also take into consideration the group’s moderated expansion into China,” it adds.

The team says it also expects Q&M’s management to ramp up its expansion plans from its current number of 83 dental outlets in Singapore and 34 in Malaysia. To that, it says it “conservatively” forecasts the group opening 10 outlets per year in both countries, which translates to 31.0% and 16.3% y-o-y clinic revenue growth in Singapore and Malaysia respectively for the FY2021 and FY2022.

The dental business model is also lucrative, in the team’s view, as gross margins have hovered around the 30% mark since 2014.

In addition, Q&M has seen new growth from its Covid-19 diagnostic tests via its 51%-owned subsidiary Acumen Diagnostics.

The tests, says the team, could remain in high demand from FY2021 to FY2023 due to the resilient and infectious nature of the virus.

“We have pencilled in $35 million/$48 million of revenue contribution from Covid-19 testing services in FY2021/FY2022, with 800/1,100 daily tests assumed to be conducted, respectively. We estimate the segment to grow to 38-39% of Q&M’s core net profits in FY2021-FY2022.”

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On the back of Q&M’s strong recurring domestic earnings, the team has forecast a two-year core net profit compound average growth rate (CAGR) of 74%.

“We also project free cash flow of $26 million/$34 million after incorporating expansionary capex and dividend payout of 60%. This translates to an FY2021 distribution per share (DPS) of 2.5 cents and attractive dividend yield of 3.8% (above peers),” it says.

As at 2.38pm, shares in Q&M are trading 0.5 cent higher or 0.8% up at 65 cents.