CGS-CIMB Research has upgraded its recommendation on Q&M Dental Group to “add” from “hold” after the group’s diagnostics arm Acumen won a tender from the Ministry of Health (MOH) to operate a Joint Testing & Vaccination Center (JTVC).
The tender is estimated to be worth $3.6 million in revenue for the group and is for a period of 15 months from October 2022 to December 2023.
While analysts Tay Wee Kuang and Kenneth Tan have yet to incorporate the potential earnings impact on the group, they believe that the tender win will help to alleviate the short-term pressure the group is currently experiencing.
This is given Q&M’s disclosures for the 2QFY2022 ended June that suggested Acumen recorded $170,000 in net losses. The net losses are likely due to the drastic reduction in polymerase chain reaction (PCR) testing for Covid-19 in Singapore during the quarter, the analysts observe.
“From our understanding, Q&M has since streamlined Acumen’s operations to manage costs while retaining its diagnostics capabilities. The tender could lift Acumen back to profitability and present Q&M with an opportunity to expand its offerings to include vaccination services in the future,” they write.
For the 3QFY2022, Tay and Tan are expecting Q&M to report revenue of $45 million, down 22% y-o-y and net profit of $4.5 million and down 68% y-o-y. The y-o-y declines are due to the high base in the 3QFY2021 from the peak of Covid-19 contributions, the analysts note.
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“Stripping off Covid-19-related contributions, revenue run rate was likely comparable both y-o-y and q-o-q, which we believe exhibits the resilience of Q&M’s dental core business,” the analysts write.
“Latest data from the MOH also showed that monthly dental visits in July reached more than 82,000, recovering from the downtrend observed across 2QFY2022,” they add. “Q&M’s cost profile is also likely to improve given that employee bonuses, previously recognised only in the fourth quarter in prior years, were accrued for in 2QFY2022.”
Despite the upgrade, Tay and Tan have kept their target price unchanged at 44 cents. The target price is pegged to Q&M’s FY2023 P/E of 20x, 1 standard deviation (s.d.) below its five-year historical mean.
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“The current share price represents a forward P/E of 15x, close to 2 s.d. below its five-year historical mean and near its all-time low of 13.7x. We believe valuations have turned attractive for Q&M as our FY2023 earnings estimates account for negligible contribution from Acumen while expecting continued improvements in its dental core business,” the analysts write.
In their view, stronger-than-expected growth in dental core revenues, extensive government efforts in rolling out bivalent Covid-19 vaccines and significant commercialisation of gestating assets, such as Q&M’s digital artificial intelligence (AI) system are re-rating catalysts for the stock.
On the other hand, larger-than-expected costs for gestating assets and sluggish dental demand are downside risks.
As at 12.45pm, shares in Q&M are trading 0.5 cent lower or 1.47% down at 33.5 cents.
