Maybank Kim Eng analyst Eric Ong has commenced coverage on Q&M Dental Group with a ‘buy’ rating and target price of 87 cents.

His target price is pegged to an FY2021 P/E ratio of 22 times, which implies a 15% discount to the sector average of 26 times. 

In a research note dated March 29, Ong says he expects the group to close the valuation gap against its bigger listed peers due to a more superior earnings trajectory for FY2021 to FY2023, underpinned by growth from its new Covid-19 testing business and opening of more clinics.

Q&M Dental’s 51%-owned subsidiary Acumen conducts Covid-19 testing services, with 127 selected clinics in Singapore currently sending swabs to its laboratory. Ong says the group is ramping up testing capacity to capture a sizeable pie of the testing business from the government.

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“We have forecasted earnings contribution of $8 million from sales of test kits and lab services, which forms over 25% of its patmi in FY2021,” he says.

For its core dental business, Ong points out that revenue has remained resilient even during the pandemic.

Looking ahead, Q&M hopes to increase market share with a target to open 30 outlets a year from 2021 onwards in Singapore and Malaysia for the next 10 years.

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

In addition, Ong notes that Q&M has plans to launch a machine learning-guided dental treatment plan in Singapore this year, which he says should help to cater to the rising demand for higher-value specialist dental healthcare services.

“With all the growth initiatives in place, we expect future profitability to be increasingly driven by its core dental business rather than share of associate profit and/or one-off gain,” he says.

Shares in Q&M closed down 1 cent or 1.56% lower at 63 cents on April 1.