Q&M Dental Group

CGSCIMB “add” 79 cents DBS Group Research “buy” 72 cents Price target:

Valuations still attractive despite earnings miss

While Q&M Dental Group reported record earnings of $30.5 million for FY2021, its earnings of $3.2 million for 4QFY2021 ended December 2021 was below expectations of some analysts.

CGS-CIMB Research analysts Tay Wee Kuang and Kenneth Tan, who expected the dental group to log earnings of $7.4 million for the quarter alone, attributed the lower-than-expected earnings to higher staff and tax expenses.

As indicated in their Feb 24 report, Q&M’s revenue for the 4QFY2021 was in line with their expectations at 99% of their forecasts as they had “expected a seasonally stronger dental core revenue to partially offset lower Covid-19 testing during the quarter as Singapore shifted towards self-testing”.

During the year, Q&M opened 14 new dental clinics in Singapore, in line with their estimates, but below management’s target of 20 new clinics in Singapore.

With the company “steadfast” to hit its goal of opening 20 new clinics in Singapore and 10 in Malaysia per year for the next 10 years, the analysts expect this aggressive expansion to underpin revenue growth in the future that will offset weaker testing revenues, note the analysts in their Feb 24 report, where they’ve kept their “add” call target price of 79 cents. As the daily polymerase chain reaction (PCR) tests continue to decline in February, CGS-CIMB’s Tay and Tan believe the supervised antigen rapid test (ART) services offered at Q&M’s clinics should help to partly offset the drop in PCR volumes.

“Acumen is also exploring the rollout of new PCR use cases (e.g. sepsis, dengue), which we believe could be a new earnings driver should commercialisation be successful,” write the analysts.

DBS Group Research analyst Paul Yong has similarly deemed Q&M’s 4QFY2021 earnings a miss, as he keeps “buy” on the counter with a lower target price of 72 cents from 80 cents before.

Yong sees pressure on revenue and margins for Q&M’s Acumen business going forward on the back of lowered demand for polymerase chain test (PCR) tests.

“Hence, we cut our estimates as we moderate our expectations and await more concrete plans regarding the testing business,” writes Yong in his Feb 25 report, where he lowered his earnings estimates for the Acumen Diagnostics business due to the fall in demand for PCR tests in Singapore.

However, like the analysts at CGS-CIMB, Yong is positive on Q&M’s primary healthcare segment given its “clear expansion strategy” for the next 10 years. “We expect to see the fruits of organic growth in FY2022, with more to come in the next nine years,” says Yong.

He has also deemed Q&M’s valuations as “undemanding”, which makes its current share price a good time to buy.

Yong notes that Q & M is currently trading at 15.5x FY2022 P/E, which is around 1 standard deviation below its five-year average, with an EPS CAGR of 12.8% over FY2021–FY2023. It is also an attractive yield play with FY2022 yield of 7.5%, writes Yong.