Q&M Dental Group - CGS-CIMB Research 2021-03-09: A Reason To Smile; Initiate Coverage With ADD

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Q & M DENTAL GROUP (S) LIMITED (SGX:QC7)

Q&M Dental Group - A Reason To Smile; Initiate Coverage With ADD

• We like Q&M Dental for its almost recession proof, lucrative dentistry franchise and very entrenched position in the profession in Singapore (83 dental outlets).
• The key catalyst is net profit growth from its new COVID-19 diagnostic testing segment which could contribute ~38% of its core net profits in FY21-22F.
• We initiate coverage on Q&M Dental Group with an ADD rating and target price of S$0.92, based on 20x FY22F P/E against our 2-year core earnings CAGR forecast of ~74%.

Q&M DENTAL GROUP - INVESTMENT MERITS

Valuations undemanding at -2 standard deviation of historical average P/E

• We initiate coverage on Q&M Dental Group (SGX:QC7) with an Add rating and a target price of S$0.92, based on a P/E valuation basis. Historically, Q&M Dental has traded at an average forward P/E of ~35x due to its growing presence since 2014 in China via investments in dental groups such as Shenyang Aoxin Stomalogy Group (“Aoxin”) and Qinhuangdao Aidite High Technical Ceramic (“Aidite”).
• Since 2017, Q&M Dental has gradually moderated its presence in China, with the group having only 1 dental outlet in China as of end-FY20. Currently, Q&M Dental trades at ~14x FY22F P/E or -2 sd of its historical average (since listing). It is also lower than its pre-China growth phase trading band of 30x in 2009-2013.
• Q&M Dental’s peer group includes Singapore-listed healthcare companies with dental services which are trading at 27x CY22F P/E. We think it fair that the group should trade at 20.0x P/E considering its strong expected earnings growth in FY21F/22F. This represents a ~25% discount to comparables, which we view as warranted considering its relatively small market cap.
• Potential re-rating catalysts include faster-than-expected opening of new clinics, and higher-than-expected number of COVID-19 tests conducted.
• Key downside risks include resurgence in COVID-19 infections, reputational risks, increasing competitive pressure from rivals, and rising employee costs.

Dental operations firmly entrenched in Singapore

• We like Q&M Dental for its strong market position in the Singapore private dental space. Since 2012, Q&M Dental has been committed to consistent expansion of its dental outlet network in Singapore. Q&M Dental has grown its total number of dental outlets in Singapore from 56 outlets in 2012 to 83 outlets in 2020, representing ~10% of the total number of private dental outlets in Singapore as of end 2019.
• Q&M Dental employs approximately 230 dentists according to its FY19 annual report, which represents ~12% of the total number of private sector dentists in Singapore as of end 2019. Outlet growth in 2020 was stalled as a result of uncertainties arising from the COVID-19 pandemic, with new net outlets for the year coming in at 6 (vs. 22 in FY19). We conservatively assume that Q&M Dental will add 10 new outlets in Singapore p.a. in FY21-23F as uncertainties from COVID-19 remain.

Recession-proof dental business

• Despite headwinds faced from COVID-19, Q&M Dental was still able to record topline growth (+7.5% y-o-y) on the back of better performance from its dental and medical outlets, as well as new contributions from the COVID-19 testing segment.
• For FY20, Q&M Dental received S$3.1m in assistance from the Job Support Scheme, S0.6m from the Enhanced Special Employment Credit & Wage Credit, and S$3.4m in rental rebates. Excluding these, Q&M Dental was still able to record a core net profit of S$12.2m in FY20, a 44.6% y-o-y increase. As such, we view the group’s resilient business model favourably.
• Based on our forecasts, we estimate Q&M Dental’s dental segment revenue to be S$166m/192m for FY21F/22F, indicating a y-o-y growth of 31.0%/16.3%.

Growing earnings contribution from COVID-19 testing

• As of Sep 2020, Acumen Diagnostics, a 51%-owned Q&M Dental's subsidiary, received approval from Singapore’s Ministry of Health to conduct COVID-19 testing and sell diagnostic test kits within Singapore. At present, travellers entering/leaving Singapore are subjected to multiple swab tests. Frontline workers from specific industries are also rostered for routine testing (RRT) every fortnight. We think these precautions will be deemed the new norm going forward in FY21F/22F due to the highly contagious and resilient nature of COVID-19.
• Based on Sep 2020 figures from the Ministry of Health, an average of 27,200 individuals were tested for COVID-19 daily using PCR tests. Assuming 28,000 individuals are PCR-tested daily in Singapore, we expect Q&M Dental to be able to capture ~3% of daily tests in FY21F as the group has only recently entered the sector. This amounts to 800 daily tests in FY21F. As the group ramps up its testing operations, we expect daily tests to steadily increase to 1,100/1,200 daily tests in FY22F/23F. This translates to S$35m/48m or 17% / 19% of group revenue for FY21F/22F. We forecast net profit from the segment to be S$10m/S$14m for Q&M Dental in FY21F/22F. These represent substantial earnings contributions at 38.1%/39.4% of core net profits for the respective years.

Q&M DENTAL GROUP - COMPANY OVERVIEW

• Q&M Dental Group (SGX:QC7) provides private dental healthcare services in Asia. Established in 1996, Q&M Dental was listed on the Singapore Exchange mainboard in Nov 2009. Q&M Dental is the largest operator of private dental outlets in Singapore, with the group operating an extensive network of 83 dental outlets in the country as of end-FY20. Q&M Dental has also expanded its operations to Malaysia and China.
• Q&M Dental Group operates under three business segments:-
  1. primary healthcare;
  2. dental equipment & supplies distribution
  3. sales of test kits & laboratory tests.
• For the primary healthcare segment, Q&M Dental provides dental and medical healthcare services via its network of clinics and centres. Under the dental equipment & supplies distribution segment, the company distributes dental supplies and equipment to both the group’s network of clinics as well as external third parties. The sales of test kits & laboratory tests segment focuses on the distribution of COVID-19 test kits and the provision of COVID-19 laboratory testing services.

Primary healthcare

• Q&M Dental operates both dental and medical clinics. Dental clinics offer a wide range of high-quality dental services covering both general and cosmetic dentistry. Its medical clinics provide general healthcare services and procedures as well as vaccinations. As of end-FY20, Q&M Dental operates 83 dental outlets and 5 medical outlets in Singapore. In Malaysia, the group operates 34 dental outlets spread across Johor, Malacca, and Kuala Lumpur. The group also operates a dental clinic in Shanghai, China.
• Q&M Dental clinics provide a wide range of primary care dental services. In addition to primary care dental services, the group also provides specialist services which include endodontics, oral surgery, orthodontics, paedodontics, periodontics, and prosthodontics.
• Since end-FY18, Q&M Dental has been actively developing AI-driven dental healthcare software. The group intends to develop an AI system which offers standardised treatment plans based on a patient’s dental health. The system will offer accurate diagnosis while avoiding human-led errors arising from biased judgement. In the group’s view, such a system will encourage more patients to patronise Q&M Dental’s services due to strong confidence in the group’s dental services.
• As of end-FY20, the primary healthcare segment recorded S$126m in revenue (+6.1% y-o-y), representing 91.8% of Q&M Dental’s total revenue.

Dental equipment and supplies distribution

• Q&M Dental distributes dental equipment and supplies via its distribution arms, Quantumleap Healthcare and AR Dental Supplies, with the companies located in Singapore and Malaysia, respectively. Under this segment, the group distributes dental equipment to its own network of dental clinics, as well as to third-party dentists and dental clinics.
• As of end-FY20, the dental equipment and supplies distribution segment recorded S$9m in revenue (+2.4% y-o-y), representing 6.6% of total group revenue.

Expansion into COVID-19 testing capabilities

• Q&M Dental has expanded into COVID-19 testing via its 51%-owned subsidiary Acumen Diagnostics (Acumen), which is a joint venture company established in Apr 2020 between Q&M Dental and Acumen Research Laboratories.
• Acumen engages in the production and distribution of COVID-19 diagnostic test kits, as well as conducts laboratory testing services for COVID-19. Testing services will be conducted using Acumen’s proprietary SARS CoV-2 RT- PCR test kit, Acu-Corona 2.0. As of Sep 2020,
• Acumen has obtained a healthcare institution license from Singapore’s Ministry of Health to conduct Polymerase Chain Reaction (PCR) testing services for COVID-19 in Singapore. According to the group, the PCR test kits are unique as reagents are robotically pre-dispensed and dried in the reaction plates, which improves labour efficiency and consistency of results. Swab specimens are sent by the Ministry of Health to Acumen’s laboratories for analysis, which are tested for the presence of COVID-19.
• The group also engages in the sale of its Acu-Corona 2.0 test kits. Q&M Dental has received approval to sell its proprietary test kits in Singapore. In Jul 2020, Q&M Dental announced an exclusive distribution agreement with Azion Healthcare (Azion), whereby Azion will be appointed the exclusive distributor for Acu-Corona 3.0 test kits in Mexico. Based on the terms of the agreement, as stated from Q&M Dental's announcement on 23 Jul 2020, Acumen test kits will be sold to Mexico for an initial duration of six months, with potential renewals after the initial term. As of end FY20, Q&M Dental has yet to announce any updates on the state of its test kit distributions in Mexico.

Development of dental artificial intelligence capabilities

• Q&M Dental has been actively developing an artificial intelligence (AI) dental system since FY18, aimed at offering holistic and standardised treatment plans for patients. The AI-driven system uses automatic radiographic intervention to reduce the likelihood of misdiagnosis and formulate standardised treatment plans for patients. According to the group, usage of such a system will significantly reduce errors arising from personal judgments, paving the way for ethical dentistry adoption in Singapore.
• Being one of the forefront adopters of dental AI in Singapore, we believe that the group is well poised to grow its reputation as a highly advanced provider of high-quality dental services in the region. If ethical dental healthcare systems see strong traction in Southeast Asia, we should expect customer preferences to steadily shift towards dental clinics that utilise such software, further consolidating Q&M Dental’s presence in the region.

Venture into dental education

• Q&M Dental incorporated a private dentistry college (Q&M College of Dentistry) in Singapore in December 2018, the country’s first dentistry college offering postgraduate diplomas in clinical dentistry. Located at City Square Mall, the college offers a two-year graduate diploma course in clinical dentistry. Going forward, the group hopes to further collaborate with educational institutions, establishing Singapore as a focal point for high quality dental education.
• In line with the group’s vision in developing the next generation of dentists, Q&M Dental launched its Group Scholarship Scheme in Oct 2019. As part of the scheme, Q&M Dental will grant at least S$0.5m in scholarships to dentistry students from the National University of Singapore. These students will subsequently work as dentists with Q&M Dental for a minimum of two years, after completion of their bond with the Ministry of Health.
• In Jul 2020, Q&M Dental announced the Place-and-Train programme, whereby the group will hire and train mid-career dental surgery assistants to support its growing operations.

Q&M DENTAL GROUP - SHAREHOLDING STRUCTURE

• As of 8 Mar 2021, Q&M Dental’s largest controlling shareholder is Quan Min Holdings (~59%), an investment holding company established in 2008 by Q&M Dental’s founding dentists. According to the group’s prospectus, the founding dentists are subjected to 10-year service contracts with Q&M Dental. As of 23 April 2019, 14 of the 17 senior founding dentists have extended their existing service agreements until 15 Jan 2030. Please refer to the appendix for details of the service agreements entered into.
• In addition, Q&M Dental announced on 23 Oct 2020 that nine of its promising next generation dentists have agreed to sign 10-year service agreements with the group. The dentists will enter into an agreement similar to that of the 14 aforementioned senior dentists, whereby shares will be held in Q&M Dental via a newly-incorporated investment holding company.

Q&M DENTAL GROUP - FINANCIALS

Strong revenue growth expected in FY21-23F

• Q&M Dental's FY20 revenue came in at S$138m (+7.5% y-o-y) as a result of higher revenue from dental outlets in Singapore and Malaysia, as well as new contributions from its sale of test kits and laboratory test services.
• Going forward, we forecast S$210m/S$251m in revenue for 2021F/22F. Revenue growth (+52.9% y-o-y) in FY21F is likely to be driven largely from rebounding revenue contribution from dental clinics in Singapore and Malaysia, as well as greater topline contributions from the testing segment.
• We expect Q&M Dental to accelerate its expansion plans in 2021F, with an average of 10 new dental outlets to be opened in Singapore per year in FY21-23F. Similarly for Malaysia, we expect Q&M Dental to open an average of 10 new dental outlets per year in FY21F-23F. As such, we forecast dental and medical clinics revenue to record 31.0%/16.3% growth for FY21F/22F, tapering to 4.2% for FY23F.
• In addition, COVID-19 testing presents a new growth opportunity for Q&M Dental. As shown from the announcement in Feb 2021, the Singapore Government aims to raise the daily COVID-19 testing capacity via tapping private sector testers. Assuming 28,000 PCR tests are conducted daily in Singapore, we estimate Q&M Dental to be able to conduct 800/1,100 daily tests in FY21F/22F, respectively, with each test yielding a net profit margin of 30%. This translates to S$35m/48m in revenue for FY21F/22F and net profits of S$10m/S$14m.

Sustainable margin from organic growth

• Q&M Dental has maintained its gross profit margin at ~30% since FY14. GPM dipped to ~27% in FY19 as a result of higher employee benefit expenses incurred (+9.6% y-o-y) from increased headcount to support the expansion of dental and medical outlets in Singapore (+8) and Malaysia (+14). There was also one-time special bonus to staff from the partial disposal of Aidite.
• Q&M Dental's GPM rose to 32.6% in FY20 from stronger topline growth and support schemes granted by the Singapore Government. We expect GPM of 32.2%-32.8% in FY21-23F in line with growing topline as well as higher-margin contribution from PCR tests.
• Q&M Dental's OPM in FY16 and FY17 were elevated at ~23% because of several one-time gains from the spin-off of Aidite (FY16) and Aoxin Q&M (SGX:1D4) (FY17). Excluding these, the OPM have been in the range of ~14% from FY15-FY18. OPM for FY20 came in at 19.0% as a result of a stronger topline growth and rental rebates received.
• We have factored in OPM of ~21% in FY21F to account for a one-off S$5m gain from the proposed disposal of its 12.2% stake in Aidite.

Net debt position to improve on the back of strong FCF generation

• Q&M Dental has maintained a net debt position since FY15 as a result of loans undertaken. Net debt position reached its peak of S$75m in FY19 largely as a result of S$68m in long-term bank loans and S$16m in short-term bank loans. The group’s net debt position decreased to S$29m in FY20 largely as a result of the redemption of preference shares held in trust in Aidite.
• Q&M Dental was able to record healthy FCF of S$21m/S$19m in FY19/20 on the back of strong operating cash flow generation of S$28m/26m.
• Going forward, we expect Q&M Dental to continue reducing its net debt position as operating cash flow strengthens. Based on our estimates, we expect Q&M Dental to grow its FCF to S$26m/S$34m in FY21F/22F, with net debt expected at S$25m/S$16m.

Capex comfortably covered by cash flows

• We expect Q&M Dental’s capex to rise in FY21-23F in tandem with heightened expansion of outlets. Based on our assumption of 20 new outlets to be opened p.a. (10 in Singapore, 10 in Malaysia), we forecast S$10m/S$11m in capex spend for FY21F/22F. This is well covered by the group’s strong operating cash flow generation over the same period of S$36m/S$45m.

Divided should rise in tandem with topline growth

• Q&M Dental maintains a dividend policy of paying at least 30% of operating earnings to shareholders. It has been paying about 65% of its net profits since FY11. In FY20, Q&M Dental recorded a dividend of S$0.034 per share (payout ratio of ~136%) due to the outperformance of the group as well as the potential gain from disposal of its remaining 12% stake in Aidite (completion in FY21).
• For FY21-23F, we forecast a 60% payout ratio, taking into consideration the expected growth in profitability. This translates to a dividend of S$0.025/S$0.028 per Q&M Dental share for FY21F/22F.
• See
  • Q&M Dental Share Price;
  • Q&M Dental Target Price;
  • Q&M Dental Analyst Reports;
  • Q&M Dental Dividend History;
  • Q&M Dental Announcements;
  • Q&M Dental Latest News.

LIM Siew Khee CGS-CIMB Research | Cezzane SEE CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-09

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