PhillipCapital has initiated “buy” on Q&M Dental Group with a target price of 70 cents as the brokerage expects the group to post “record earnings” for its upcoming results.

The target price, according to PhillipCapital’s head of research Paul Chew, is based on 20 times FY2021 price-to-earnings (P/E) for its “core operations and market cap valuations of its listed associate Aoxin”.

The way Chew sees it, valuations for the healthcare service sector can rise to almost 40x P/E. As it is, the historical normalised P/E for Q&M is averaging around 38x, with a low of 26x.

At 20x FY2021 P/E, Chew says the group is valued at 67 cents. The remaining 3 cents was added from the market value of Aoxin.

“Our target price implies a 50% discount to historical and industry P/Es. We see opportunities for a narrowing of the discount if the company executes on expansion and new virus test kits take off as planned,” Chew writes.

Get the latest Singapore corporate news stories for FREE

He has also identified three merits into investing in the group.

First, there is a resurgence in the group’s organic growth. Before 2019, the group added an average of six dental clinics a year to its portfolio. Chew views that new clinic additions are now expected to jump to 26 a year from 2021 to 2022, representing 20% growth per annum.

“The pandemic had stalled expansion last year to an expected nine new clinics only, for 8% growth. New clinics are a more sustainable and lower-risk mode of growth than acquisitions of existing clinics,” he says.

“The group can avoid high valuations, integration risks and peak earnings. Dentists are attracted to the Q & M brand as it can draw patients and enable them to focus on their practice rather than administrative, human resource and financial matters. Border closures and work-from-home arrangements have also increased dental visits and patient spending,” he adds.

Second, there are new opportunities in PCR testing for Covid-19. The group’s 51%-owned venture, Acumen Diagnostics, received approval to offer PCR testing of Covid-19 in Singapore in September 2020.

The group can now sell its proprietary PCT diagnostic kit called Acu-Corona 2.0 and provide lab-testing services.

“We assume a 3% share of daily PCR tests with a 25% net margin from FY2021. No guidance has been provided by the company. It will account for around 13% of our FY2021 PATMI,” he says.

Finally, taking into account other potential catalysts, Chew views the group as having “attractive valuations”.

“Based on normalised earnings, P/E averaged 38 times in the past seven years. Healthcare stocks such as hospitals trade from 40 times to 80 times P/E. We believe 20 times P/E is fair as we have incorporated a large 50% discount.”

“We believe the discount may narrow as growth materialises. Other earnings drivers not incorporated in our model are PCR test kits sold globally and Aoxin’s return to profitability,” he adds.

Beyond its main revenue, which includes fees from clinical consultation, treatment and the sale of medicine and oral-care products, Q&M also derives income from other gains and associates.

Based on the past five years, the group has earned other gains totalling up to some $57 million, including a $21.3 million gain from the conversion of Aidite from subsidiary to associate. Another $17.4 million gain was booked from the listing of its associate Aoxin on the SGX-ST in 2017 while disposals in Aidite netted the group total gains of $16.6 million.

The group used to see contributions from its associate Aidite. As at Dec 31, 2020, its main associate is Aoxin Q&M, which booked a loss of $2.1 million in the 1HFY2020 due to total shutdowns of its operations in China from February to March 2020. Four of Aoxin’s dental centres were temporarily suspended from operations due to a Covid-19 outbreak in Shenyang on Dec 27, 2020.

As at 3.52pm, shares in Q&M are trading 1.5 cents higher or 3.1% up at 50 cents.