Shares in Q&M Dental QC7 are “searching for the bottom”, says Maybank Securities analyst Eric Ong, after the dental healthcare group posted results for 1HFY2023 ended June that missed consensus forecasts.
The group’s 1HFY2023 net profit of $5.3 million, down 46% y-o-y, missed both Maybank and consensus expectations. While its core healthcare business remains resilient, this was offset by weakening ringgit for its Malaysian operations, higher finance costs and less contribution from medical laboratories, notes Ong.
To conserve cash, Q&M reduced its interim dividend per share (DPS) to 0.16 cents, down from 0.4 cents the year before.
In an Aug 23 note, Ong stays “hold” on Q&M with a lower target price of 31 cents from 37 cents previously.
Improving efficiency
Q&M aims to improve efficiency to cut costs and wastage, notes Ong. 1HFY2023 revenue from the core healthcare business was down 0.5% y-o-y to $83.3 million, mainly due to steady performance from Singapore dental clinics but offset by weaker sales from its medical clinics in Malaysia, as well as unfavourable foreign exchange impact of a strong Singapore dollar against the ringgit.
Meanwhile, medical laboratory turnover fell 46.6% to $3.8 million due to less PCR testing. To mitigate rising staff and rental costs, the group plans to use central purchasing to cut wastage, and ensure more just-in-time ordering so that it can also reduce storage cost to improve efficiency, says Ong.
To achieve higher productivity and organic growth, Q&M aims to recruit more dentists, especially for its top-performing clinics.
It is also trying to develop and optimise its digital AI-guided clinical decision support system to provide more effective and suitable treatment plans for patients, according to management.
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“While this may cater to the growing demand for high-value specialist dental healthcare services, we think gestation losses in this venture could continue to weigh on its earnings in the near term,” says Ong.
Post-pandemic pivots
Post-pandemic, Q&M is developing new tests for other medical purposes. Its medical laboratory business, Acumen Diagnostic, will seek to develop a new range of tests and solutions to maximise its intellectual property and research capabilities for various medical purposes, says Ong.
These include tests for sepsis, identification of bacteria pathogens and their associated antimicrobial resistance in hospitalised pneumonia.
“To be conservative, we have yet to assume any potential income stream from this pipeline given the lack of clear visibility on commercialisation and/or timeline,” adds Ong.
Ong cuts his FY2023-FY2025 earnings per share (EPS) forecasts by 25%-34% on slower dental topline growth, exacerbated by negative operating leverage.
At the end of 1HFY2023, EPS on a fully diluted basis stood at 0.56 cents. Ong’s forecasts place Q&M’s core EPS at 1.1 cents, 1.3 cents and 1.5 cents for FY2023, FY2024 and FY2025 respectively.
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Instead of Q&M, Ong prefers Raffles Medical BSL within Singapore's healthcare sector, with a “buy” call and $1.65 target price.
Meanwhile, CGS-CIMB Research is keeping “add” on Q&M with a lower target price of 35 cents from 42 cents previously.
Q&M is contemplating the early repayment of its outstanding loans as higher finance costs have eroded its profitability, note CGS-CIMB analysts Tay Wee Kuang and Kenneth Tan.
With Q&M’s “healthy” cash balance of $33.4 million, Tay and Tan think that an early repayment of its borrowings would be an efficient way to improve profitability amid a higher-for-longer interest rate environment.
That said, this could translate into subdued dividend payments in the near term, as reflected in its 1HFY2023 DPS, add Tay and Tan.
CGS-CIMB is taking into account Q&M’s slower growth as a result of its shift to focus on cost management and operational efficiencies. Q&M’s valuations remain “undemanding” at 17x P/E for 2024, at 1.5 standard deviation below mean.
As at 9.41am, shares in Q&M Dental are trading 0.5 cents higher, or 1.75% up, at 29 cents.
