UOB Kay Hian has initiated “buy” on Q&M Dental Group with a target price of 94 cents representing a 22.1% upside to the counter’s last-closed price of 77 cents as at June 29.
The target price is pegged to 20 times FY2022 price-to-earnings (P/E), which is Q&M’s historical five-year average.
“We think current valuations of 16 times FY2022 P/E for Q&M and [its] dividend yield of 5.2% are attractive, given that both its key segments will deliver robust growth and leadership position in the niche dental industry,” says UOB Kay Hian analyst John Cheong in a June 29 report.
“Compared with its peers, Q&M offers higher growth, return on equity (ROE) and dividend yield”, he adds.
Q&M is a leading dental group in Singapore that enjoys robust growth due to its aggressive expansion strategy. The group was established in 1996 and is currently the largest operator of private dental outlets in Singapore. To date, it has a network of 85 dental outlets and about a 10% market share in Singapore.
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The group also operates 36 dental outlets in Malaysia.
The group’s three key segments are dental clinics, which made up 92% of its FY2020 revenue; dental equipment distribution, which made up 6% of FY2020’s revenue; and its Covid-19 test kits and laboratory tests, making up the remaining 2% of its FY2020 revenue.
The group’s FY2020 ended on Dec 31, 2020.
The dental business delivered respectable revenue growth of 26% h-o-h in the 2HFY2020 and 41% y-o-y in the 1QFY2021.
Q&M began its Covid-19 testing and test kit business through its 51%-owned subsidiary Acumen Diagnostics in September 2020 when the latter received approval from the Ministry of Health (MOH) to conduct Covid-19 testing and sell diagnostic test kits in Singapore.
Acumen made its first contribution to the group in the 1QFY2021.
Furthermore, the Health Promotion Board (HPB) has added Acumen to be a panel service provider to provide Covid-19 swab and testing services for the nation.
Q&M currently has the capacity to do around 6,000 tests per day.
To Cheong, Q&M looks set to report record core earnings of $33 million in FY2021, representing a growth of 68% y-o-y. This, he says, is likely to be driven by an 18% y-o-y growth in core earnings from Q&M’s dental business as a result of 10 new outlets a year as well as strong demand from local patients, as well as Acumen’s first earnings contribution of around $10 million, assuming 2,200 tests per day at $70 per test.
The Covid-19 testing business also looks set to remain in the long run, notes Cheong.
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He cites Minister for Finance Lawrence Wong’s remarks that the Covid-19 could last for four to five years from now.
“Virus mutations continue to be a key concern, as vaccines will need to be constantly reformulated and administered. Currently, the polymerase chain reaction (PCR) test is the most reliable test to detect active Covid-19 infections, according to the Singapore Immigration & Checkpoints Authority,” he writes.
Cheong has identified share price catalyst factors as higher-than-expected earnings due to better-than-expected performance in Q&M’s dental and Covid-19 testing businesses, a higher-than-expected dividend, or value unlocking activities or takeover offers if any.
That said, downside risks include stringent lockdown measures in the event of a resurgence in Covid-19 cases, higher competition in the industry, execution risks in expanding the number of outlets, as well as Q&M’s inability to efficiently manage its operating costs.
As at 12.33pm, shares in Q&M are trading 0.5 cent higher or 0.7% up at 76.5 cents or 4.9 times P/B, according to UOB Kay Hian’s estimates.
Photo: Bloomberg
