CGS-CIMB Research analysts Tay Wee Kuang and Kenneth Tan have downgraded Q&M Dental Group to “hold” from “add” due to the limited number of upside catalysts.
The analysts have also slashed the group’s target price to 44 cents from 73 cents previously.
“Following Q&M’s analyst briefing, we reduce our earnings forecasts for the FY2022/FY2023/FY2024 by 30%-34% on earnings void from lower Covid-19 tests,” the analysts write.
“Our revised earnings estimates take into account the removal of Covid-19 contributions and slower dental core revenue growth,” they add.
Despite the lower target price, Tay and Tan believe the market has already priced in the group’s near-term challenges.
Q&M’s core net profit for the 1HFY2022 ended June stood at $9.8 million, which was below the analysts’ expectations at 33.7% of their FY2022 estimates.
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“Apart from the slower-than-expected growth from its dental core business, we also understood from management that the lower operating leverage was a result of continued investments into its digital artificial intelligence (AI) guided clinical decision support system and a change in accounting treatment of employee bonuses and directors’ fees, which will now be accrued quarterly compared to only in the fourth quarter during FY2021,” they write.
“The relaxation of testing requirements in Singapore also saw Q%M’s diagnostics arm, Acumen, dip back into losses in 2QFY2022, compared to the high profitability observed in FY2021,” they add.
In their report, Tay and Tan also note the group’s lower average revenue per clinic, which is co-related to the general decline of dental visits in Singapore.
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Furthermore, the tight labour conditions and wage inflation could hold back the group’s organic growth ambitions, although the analysts believe their estimate of 20 new clinic openings per year remains “achievable” for the FY2022 to FY2024.
As Q&M is looking to assess its capital allocation options in the short term, which could include paying down its debt in the higher interest rate environment and for undertaking growth opportunities, the analysts are reducing their dividend expectations for the FY2022 to 1.0 cent per share from 1.8 cents previously.
The lower dividend expectations imply a payout ratio of 50%, which is in line with the group’s pre-Covid-19 levels. “We expect it to resume in the 4QFY2022,” the analysts say.
“Although Q&M maintains a dividend policy of 30% payout ratio, we think Q&M’s healthy cash balance is supportive of its historical payout ratio,” they add.
PhillipCapital is keeping its "buy" call on Q&M, but with a lowered target price of 60 cents from 71 cents previously as the group's earnings stood below its expectations.
On this, analyst Paul Chew has lowered his FY2022 patmi estimates by 16% to $22 million as he factors in the additional cost for Q&M's AI project and even weaker earnings from Acumen.
Chew's new target price values Q&M's core dental operations at 25x P/E FY2022 earnings, in line with industry peers, while its listed associate, Aoxin Q & M Dental, is valued at market price with a 20% discount.
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However, Chew is slightly more positive on the counter as he believes the group's investments will take time to see improved revenue.
"The company is expanding its dental clinics at the fastest pace since [its] inception. We estimate CAGR of 18% over the next two years," says Chew.
"2022 is a transition year as the company invests in the AI project [which will continue into the 2HFY2022], accelerates the roll-out of more clinics and Acumen pivots away from the Covid-19 polymerase chain reaction (PCR) test to other test kits," he adds.
He continues: "Revenue per clinic should improve as clinics mature. Further, the company aims to raise the utilisation of current chain of clinics by adding new dentists in existing clinics rather than adding new clinics. AI software has received approval as a Class B medical device. It is being rolled out across Q & M’s dental clinics to independently generate dental plans for patients. Next phase is to deploy to other clinics in Singapore. Acumen’s focus is on sepsis, colon cancer and pharmacogenetics screening."
As at 4.26pm, shares in Q&M are trading 2 cents lower or 4.71% down at 40.5 cents.
