The primary purpose of Q&M Dental's dental services is still uncertain

The target price (TP) for CGS-CIMB was 45 cents, a little increase from its prior target price of 44 cents. On the other side, DBS reduced its target price from 53 cents to 40 cents. Similarly, PhillipCapital decreased its target price from 60 cents to 52 cents.

Q&M Dental's core dental revenue growth is decent, according to Tay Wee Kuang and Kenneth Tan of CGS-CIMB. They noted that the company's 3QFY2022 revenue was in line with forecasts supported by strong sales momentum but fell short of profits due to losses at its Acumen diagnostics arm and higher financing costs.

They continue by predicting that employees would begin taking advantage of their corporate or individual dental benefit coverage as it approaches its expiration date at the end of the year, causing Q&M Dental's core dental income to stay seasonally high in the upcoming 4QFY2022.

Both analysts also expected some reported earnings from the Joint Testing and Vaccination Centre (JTVC) that Q&M Dental was awarded the contract to run effective October 1st.

Since the employee bonus has been accumulating since 2QFY2022 rather than FY2021, when it was first acknowledged in 4QFY2021, they predicted that reduced salary and perks would improve net profit by approximately 55 percent y-o-y in the fourth quarter of FY2022.

Tay and Tan added to their findings by noting that Q&M Dental is not likely to achieve its yearly goal of 30 additional clinics by the end of FY2022. In 3QFY2022, the group built five new dental clinics, four in Singapore and one in Malaysia, raising the total number of clinics to 152 from 128 in 3QFY2021.

Both individuals pointed out that Q&M Dental has opened 16 new dental clinics so far this year and plans to open two more in the final quarter of the current fiscal year 2022. This brings its total number of new clinic openings for the year to 18, falling short of its previously stated goal of 30 new clinic openings.

Despite that, they explained, “We are aware that the management is considering adding dental chairs in current sites to support its expansion aspirations as rentals for new locations rise.”

The new TP of 45 cents from Tay and Tan is based on a price-to-earnings ratio (P/E) of 20x for FY2024, which is 1 standard deviation (s.d.) below the five-year average. They think that at 17x its forward P/E, Q&M is still valued favorably.

However, analyst Paul Chew of PhillipCapital predicts that the company's expansion costs would begin to ‘hurt’ in the future.

Even after Singapore's clinic population rose by roughly 18 percent to 106, according to Chew, financial results have been modest. “With the reopening of borders, more money is being spent on luxury spending. The recent spike in Covid-19 instances also caused delays in patient visits and nurse availability,” according to him.

The unprecedented development of 24 clinics in Singapore and Malaysia over the previous 12 months also put a strain on profitability in the short term, as per Chew, where the company's net profit from core dental operations fell 17 percent y-o-y to $4.2 million. He thinks FY2022 will be an ‘investment year’ for Q&M Dental because of the higher start-up costs for new clinics and the costs associated with creating AI dentistry-guided software.

As new clinics mature and start to add to profitability, he anticipates FY2023 to be a turnaround year for the business. The core dentistry activities of Q&M Dental are valued at 25x P/E FY22 earnings in Chew's new TP of 52 cents.

Chew pointed out that the franchise is still growing and that there has been a change in strategy concerning clinic openings, which is encouraging. “The top goal is to use all the capacity of the clinics that are already operational before opening new ones. Other initiatives include the construction of bigger dental offices with increased profitability due to economies of scale,” he continued.

But a slowdown in the dentistry industry is likely, claimed DBS's Tabitha Foo and Paul Yong. Their updated TP of 40 cents is based on a core dentistry business P/E ratio of 18 times, which is 0.75 standard deviations below the five-year historical average.

At 16x FY2023 P/E or 0.85 standard deviations below its five-year historical average, they considered values to be reasonable for the time being. “Although we believe it will take some time for Q&M Dental's bottom line to reach FY2020 levels, its current values appear to be in line with its fundamentals. If the group can achieve better-than-expected results from its core dental business, the shares may re-rate,” according to the analysts.

Following Foo and Yong, this is because the reopening of borders had a greater impact on top-line growth than planned, new clinics took longer to get off the ground than initially expected, labor costs were higher, and the macroeconomic forecast was uncertain. They reduced their earnings estimates for FY2022 to FY2024 by 22 percent to 26 percent.

While they wait for the new clinics to start becoming profitable, both analysts Foo and Yong are continuing to be cautious about the primary of this dentistry company. “While Acumen Diagnostics recently won a Singapore Ministry of Health (MOH) tender for a JTVC, we noticed that the size of the contract is merely about 2 percent of FY2023 revenue, which does not make a difference. In the next quarters, we will keep an eye out for growth in this sector.”

As of 10 am, shares of Q&M Dental Group were trading flat at 32 cents, yielding 12.217 percent in dividends.

 

Tags: