Q&M Dental Group - Maybank Kim Eng 2021-03-29: Nothing Beats A Great Smile; Initiate Coverage With BUY


Q&M Dental Group - Nothing Beats A Great Smile; Initiate Coverage With BUY

  • We initiate coverage on Q&M Dental Group with a BUY and target price of S$0.87, pegged at 22x FY21E P/E, which implies about 15% discount to sector average of 26x.
  • We expect the Q&M Dental Group to close the valuation gap against its bigger listed peers due to more superior earnings trajectory of 58%/20%/13% for FY21-23E. This represents a 3-year CAGR of ~30% compared to 14% in FY18-20, underpinned by growth from its new COVID-19 tests business and opening of more clinics.

Q&M Dental Group - Corporate Information

  • Q&M Dental Group (SGX:QC7) is one of the leading private dental healthcare group in Asia. It owns the largest network of private dental outlets in Singapore and aims to expand its operations geographically and vertically through the value chain in Malaysia, China and within ASEAN. It was listed on the SGX Mainboard on 26 Nov 2009.
  • Since its establishment in 1996, Q&M Dental now operates 118 dental outlets, 5 medical clinics and 3 dental supplies and equipment distribution companies across Singapore, Malaysia and China. Underpinned by about 250 experienced dentists and close to 400 supporting staff, it continues to expand its operations through organic growth across the island.
  • Outside of Singapore, Q&M Dental continues to grow its presence in Malaysia organically. Apart from providing general & specialised dental and medical care, it has expanded into postgraduate education with the establishment of the Q&M College of Dentistry in 2019. Q&M Dental Group offers Singapore’s first private postgraduate diploma programme in clinical dentistry.

Q&M Dental Group - Investment thesis

Boost from sales of COVID-19 test kits and lab services

  • On 14 Sept ’20, Q&M Dental’s 51% subsidiary Acumen Diagnostics (Acumen) was granted the Healthcare Institution License issued by the Ministry of Health to offer clinical laboratory testing services for the SARS CoV-2 RNA. We see Q&M Dental as a strong beneficiary with Singapore government planning to tap the private sector to significantly ramp up its capacity to test for COVID-19 infections.
  • Acumen will use its proprietary SARS CoV-2 RT-PCR test kit, Acu-Corona® 2.0, which has received Singapore Health Sciences Authority’s (HSA) Provisional Authorisation for clinical use in Mar ‘20, to provide testing services. The Acu-Corona® 2.0 test is based on detecting 2 genes of the COVID-19 virus, Rdrp and E, thereby enhancing sensitivity and has no cross-reactivity with a range of other viruses that also cause respiratory illnesses.
  • The Acu-Corona® 2.0 test has been independently validated through the Proficiency Testing program for SARS CoV-2 implemented by College of American Pathologists (CAP). Since Jan ‘20, Acumen has been working to develop the Acu-Corona® technology, established its manufacturing capability and the company has now set up its clinical laboratory testing.
  • Manufactured in Singapore, the Acu-Corona® series of SARS CoV-2 RT-PCR tests are already being used in several other countries including Malaysia and Indonesia. The unique feature of the Acu-Corona® test kits is that the reagents are robotically pre-dispensed and dried in the reaction plates, helping to save time for laboratory technologists performing the tests and improving consistency of results.
  • Even with the rollout of vaccination programme, the virus is mutating and it may still be possible for vaccinated individuals to spread the virus and infect those who are not yet vaccinated. It will thus be some time before Singapore and the entire world return to pre-COVID normalcy.
  • Given it is pertinent to quickly re-open the economy safely as the authorities look at establishing travel corridors with other countries, reliable PCR testing with results obtained at reasonable time is essential.
  • Against this backdrop, Q&M Dental is doubling its COVID-19 PCR laboratory testing capacity to try and capture a sizable portion of the current 30k+ tests a day conducted by the government. The offering of such testing services through Acumen also comes at the right point in time, as Q&M Dental diversifies its business and identifies new opportunities for growth.

Room to expand more dental clinics in SG & MY

  • As of Feb 2021, Q&M Dental currently operates 85 clinics in Singapore. It will continue to focus on its local operations and has initiated a strategy of intensive organic growth of its dental clinics in Singapore.
  • Q&M Dental will expand its team of dentists to support the future growth of its operations. We understand that patient volumes have gradually recovered to pre-Covid level on the back of a full resumption of clinic operations and pent-up demand for dental services.
  • Across the causeway, Q&M Dental operates 35 clinics in Malaysia. The clinics are 15 dental clinics in Johor, 15 dental clinics in Kuala Lumpur and 5 dental clinics in Malacca.
  • Looking ahead, Q&M Dental intends to open up to 30 dental clinics a year from 2021 onwards in Singapore and Malaysia for next 10 years. But we conservatively assume the Group will expand 15 new outlets (SG: 10, MY: 5 ) per annum from FY21-23 giiven the evolving COVID-19 situation.
  • We believe Q&M Dental’s core markets are far from saturation compared to other developed countries in the world. Apart from organic growth in Singapore and Malaysia, management is also continually looking for opportunities for expansion by opening new dental clinics within the greater Southeast Asia region.

Dental AI to drive value proposition

  • Another key area that Q&M Dental is developing is Artificial Intelligence (AI) technology as R&D and innovation remains fundamental to stay ahead of competition, as well as improve the standards of dentistry practice and methods.
  • Notably, it has been working closely with AI Singapore and a team from the International Medical University in Malaysia, together with an internal team of about 35 experienced and highly qualified dentists since early 2019.
  • As this AI platform was built based on the combination of clinical data from Q&M Dental and its collective expertise in diagnostics and treatment and the latest research in dentistry, the Group believes that this AI platform will greatly assist its dentists to quickly and accurately identify a patient's underlying condition, and subsequently suggest the most suitable treatment.
  • Meanwhile, it will continue to develop, invest and optimise its AI platform that will assist in further improving data diagnosis through automatic radiographic interpretation and form automated treatment plans.
  • Q&M Dental plans to launch the ethical AI enhanced guided dental treatment plan in Singapore sometime this year. This should help to cater to the rising customer demand for higher value specialist dental healthcare services.

Q&M Dental Group - Financial Analysis

  • Q&M Dental Group has three key business segments:
    1. Primary Healthcare comprising dentistry, family medicine, specialist services and dental college education.
    2. Dental Equipment Distribution comprising distribution of dental supplies and equipment.
    3. Sales of Test Kits & Laboratory Tests comprising distribution of COVID-19 test kits and laboratory testing.
  • We expect topline growth from primary healthcare segment to be mainly driven by contributions from existing and new dental outlets in Singapore and Malaysia. While management targets to aggressively expand 30 new clinics a year (SG / MY: 20 / 10), we only assume Q&M Dental to open 15 outlets per annum for Singapore (10) and Malaysia (5 ) as uncertainties from the current COVID-19 situation persist.
  • The turnover increase in dental equipment and supplies distribution segment will largely come from dental equipment and supplies trading company in Singapore and Malaysia, as well as sale of equipment and PPE used in dental clinics and front line operations to protect against COVID-19.
  • In our view, the sales of test kits and laboratory tests will provide the key growth engine in FY21E. We have forecasted earnings contribution of S$8m from this new segment, which forms over 25% of its net profit in FY21E. See our assumptions in report attached below.
  • On 23 Jul 2020, Q&M Dental has also appointed Azion Healthcare as the exclusive distributor for AcuCorona 3.0 test kits in Mexico. It will be sold to Mexico for an initial duration of six months, with potential renewals after the initial term. Based on the terms of the agreement, Azion will purchase 5 million test kits within three months of obtaining regulatory approvals. However, we have yet to factor this potential income into our estimates.
  • Breaking down by expenses, the largest cost item is employee benefits expense, which accounts for ~55-60% of revenue. As Q&M Dental’s dentists are not paid a fixed salaries, but instead based on a profit-sharing model typically at pre-agreed percentages of fee revenue depending on the seniority of the dentists.
  • Meanwhile, we expect rental costs to trend lower as mall landlords provides rebates to entice financially stable tenants such as healthcare operators like Q&M Dental. Coupled with growing contribution from the higher-margin tests business, we expect Q&M Dental’s operating leverage to rise in FY21-23E.
  • Despite higher capex requirements arising from outlets expansion over the next few years, we expect Q&M Dental’s free cash flow to remain healthy. As such, net gearing should continue to improve backed by its strong cash generating business model.

Q&M Dental Group - Valuation & Recommendation

  • We initiate coverage on Q&M Dental with a BUY and 12-month target price of S$0.87, pegged at 22x FY21E P/E, which implies 15% discount to sector average of 26x. We think it is fair for Q&M Dental to close the valuation gap against its bigger listed peers due to more superior earnings growth.
  • Q&M Dental aims to pay out at least 30% of its core operating profits but we believe it has the capacity to raise its payout ratio. For FY21-23E, we forecast dividend of S$0.025/ S$0.03/ S$0.035 per share, in tandem with the anticipated growth in recurring income. This also translates into a prospective yield of 4.1%- 5.7% for Q&M Dental, which looks attractive versus other healthcare players.
  • Key re-rating catalysts will include higher-than-expected number of new outlets and COVID-19 tests conducted, better margins as well as dividends may surprise on the upside given robust FCF.
  • See

Q&M Dental Group - Risks

Increasing staff costs to attract and retain dentists

  • Employee expenses form the bulk of its operating costs i.e. around 55-60% of revenue, which mainly includes professional fees paid to dentists employed under Q&M Dental for their services rendered. On 23 Oct 2020, nine of its promising next generation dentists have agreed to sign 10-year service agreement with the group. They will thus enter into an arrangement - incorporate a new investment holding company to hold their shares, similar to that entered into between the founding dentists of the Group in respect of its controlling shareholder, Quan Min Holdings.

Resurgence of COVID-19 outbreak

  • While the pandemic situation seems to be under control, a renewed spike in COVID-19 infections could result in another circuit breaker or lockdown being imposed by the respective governments. Notwithstanding dental outlets are classified as essential services under primary care service and Q&M Dental can carry on with non-elective, urgent and emergency dental services, patient volume will still be affected due to deferment of certain complicated procedures.

Continued losses from its China associate

  • Q&M Dental's 43.4% owned Aoxin Q&M (SGX:1D4) has been loss-making for the past three financial years. The company reported net loss of RMB12.1m in FY20 (FY19: RMB13.5m loss) as all its 16 dental centres were suspended from providing non-essential dental services in Feb and Mar ‘20. That said, management remains optimistic of progressive recovery, as patient load has been recovering.
  • Meanwhile, it will mitigate the gestation losses of its newly opened dental hospitals and polyclinics by further streamlining and integrating the resources across its operations.

Eric Ong Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-03-29
SGX Stock Analyst Report BUY INITIATE BUY 0.87 SAME 0.87