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CGS-CIMB keeps ‘add’ on Q&M Dental as part of managing post-Covid-19 growth expectations

Chloe Lim
·3-min read

Photo: Albert Chua/The Edge Singapore

CGS-CIMB Research analysts Tay Wee Kuang and Kenneth Tan have kept an “add” rating on Q&M Dental with a lowered target price of 73 cents from 79 cents.

Q&M saw its revenue and core net profit grow 6.9% and 28.3% y-o-y in 1QFY2022 ended March, estimated to be driven entirely by its diagnostics business of Covid-19 testing, compared to the lower intensity of the segment a year ago.

On the other hand, revenue from its dental and medical clinics fell 1.6% y-o-y to $38.6 million despite operating 19 more dental clinics compared to a year ago.

Q&M’s 1QFY2022 revenue and net profit missed the analysts’ expectations at 21.0% and 19.4% of our FY2022 estimates on lower-than-expected dental core revenue.

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The lower number of dental visits were the result of the spike in Omicron cases during the quarter, which affected Q&M’s staff as well. “However, we believe the reopening of borders could have also contributed to the lower revenue intensity, especially given the resumption of fuss-free travel to Malaysia, allowing patients to cross the border for cheaper dental services,” say Tay and Tan.

While Tay and Tan expected Q&M to offset the weakness in revenue intensity through its aggressive plans for clinic openings, the group only managed to open two dental clinics in Singapore and three in Malaysia during the quarter. This is within their expectation of 20 dental clinics opening in total for FY2022 but below the target of 30 set out by the management.

“The lifting of most of the restrictive Covid-19 measures should improve business sentiments and spur more clinic openings but we expect most of Q&M’s clinic openings to only occur in 2HFY2022, which could partially defer net profit contribution to FY2023,” say the analysts.

Q&M also announced an interim dividend of 0.4 cents for 1QFY2022, a 60% decline y-o-y that translates to a payout ratio of 58%. This was below the 80% payout ratio expectation of the analysts for FY2022.

“We reduce our dividend expectation from 3.0 cents each for FY2022, FY2023 and FY2024 to 1.8, 2.0 and 2.2 cents respectively by cutting our dividend payout expectation to 60% from 80% previously, write Tay and Tan.

In addition, the analysts lower their FY2022-FY2024 earnings forecasts by 5%-12% on weaker revenue intensity assumptions and lower margins from the diagnostics business.

Tay and Tan believe that the share price could stay subdued in the near term due to expectations of tapering Covid-19 testing, a sub-par dental core showing in the first quarter and an annualised dividend payout of 1.6 cents compared to 4.0 cents in FY2021.

As at 4.15pm, shares in Q&M are trading flat at 50 cents at a FY2022 P/B ratio of 4.24x and dividend yield of 3.64%.

Photo: Albert Chua/The Edge Singapore

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