Q&M Dental Group - DBS Research 2021-04-29: Polishing Up For A Brighter Smile; Initiate Coverage With BUY


Q&M Dental Group - Polishing Up For A Brighter Smile; Initiate Coverage With BUY

  • Adding 20 dental clinics per year in Singapore and Malaysia to drive 20% core profit CAGR in FY20-22F.
  • New revenue stream from the sale of COVID-19 test kits and laboratory tests helps boost Q&M Dental’s bottom line and has huge potential.
  • Q&M Dental's valuations undemanding at 14.4x FY22 P/E, against 5-year mean of 22x, with attractive 7.5% FY21F yield.
  • Initiating coverage on Q&M Dental with BUY, target price of S$0.81.

Core dental services to remain as key earnings driver.

  • Q&M Dental Group (SGX:QC7)'s core dental services business contributed 92% of the Group’s total revenue in FY20. Even though the COVID-19 pandemic has created challenges for the healthcare sector with countries placed under various degrees of lockdown in 1H20, Q&M Dental’s earnings remained resilient in 2020 on the back of a strong recovery in 2H20.
  • Q&M Dental has a clear expansion strategy to open 20 new clinics a year in Singapore and 10 in Malaysia. The recruitment of dentists should not be an issue as Q&M Dental has a pull factor due to its size and stability, which is even more crucial during the uncertain pandemic period. With strong branding and marketing initiatives, dentists at Q&M Dental have a large and ready pool of repeat and walk-in patients to serve. The retainment of talent gives Q&M Dental a strong pipeline of its greatest asset – human capital.

Seizing the opportunities in a COVID-19 environment.

  • Q&M Dental Group entered a joint venture for a 51% equity stake in Acumen Diagnostics and obtained the Healthcare Institution Licence to offer clinic laboratory testing services for COVID-19. Q&M Dental Group is well positioned to capture this growth opportunity due to the high barriers to entry to obtaining the licence. Demand for laboratory testing services is expected to stay firm even after rollout of vaccines and Q&M Dental Group is targeting to double its COVID-19 Polymerase Chain Reaction (PCR) laboratory testing capacity to capture a significant portion of the daily tests conducted by the Singapore government. We see this new segment as a positive addition to the bottom line of the business.

Dental equipment and supplies distribution business to bring down costs.

  • Q&M Dental Group operates two dental and supplies distribution companies in Singapore and one in Malaysia. We expect the dental equipment and supplies distribution business to help Q&M Dental Group bring down costs in the long run. Over time, we expect to see cost savings from economies of scale.

First mover advantage in dental artificial intelligence (AI).

  • Q&M Dental Group is exploring dental AI and is focusing on developing dental healthcare software in diagnosing conditions and proposing ethical treatment plans. This would be the first of its kind in Southeast Asia for use in the dental healthcare sector. We believe this development will be a game-changer in the dental industry with Q&M Dental Group as the first to implement, thereby enhancing the standards and the quality of service that patients can expect.

Experienced management team.

  • With over four decades of dental expertise, Q&M Dental Group’s management team is highly qualified in terms of knowledge and experience. We like that the management team has a clear and strategic plan going forward, especially in terms of the core dental business which we are optimistic on.

Initiate coverage on Q&M Dental with BUY

  • Initiate coverage on Q&M Dental Group with BUY; target price S$0.81 based on SOTP-based valuation, translating to 19x FY22F P/E. Our assumptions are:
    • Primary Healthcare (Dental and Medical Clinics) and Dental Equipment and Supplies Distribution: This is the core business of Q&M Dental Group, accounting for 98% of FY20 revenue. Q&M Dental Group has the largest network of private dental outlets in Singapore with an expanding presence in Malaysia. With its expansion strategy to capture more market share in Singapore and Malaysia, we are optimistic on the growth of this segment. We assign a P/E multiple of 22x given that
      • the stock’s five-year historical average P/E is 22.4x; and
      • the two close comparable peers in terms of business and market cap, Pacific Smiles Group and 1300 Smiles, are trading at an average of 25.3x FY22F P/E.
    • Aoxin Q&M (SGX:1D4) (associate held by Q&M Dental Group): Q&M Dental Group has a 43.38% stake in Aoxin Q&M, which has a market capitalisation of S$68.7m. The market value of the stake in Aoxin Q&M is S$29.8m, which translates to S$0.04 per share.
    • Acumen Diagnostics (sales of test kits and laboratory testings): Although we like this new segment and see huge upside potential, we remain uncertain about the longevity of this new business. Hence, we see 5x P/E multiple as fair.
  • See

Key risks:

  • Reopening of borders. Dental treatments in places like Johor Bahru and Bangkok are popular with Singaporeans as they are more affordable. As travel recovers, consumers would no longer be limited to dental treatments in Singapore and would be able to travel for it.
  • Execution risks – core dental business and Acumen Diagnostics. There could be execution risk, resulting in less than expected opening of new clinics and less than expected COVID-19 laboratory testings and test kits sold.
  • Renewed lockdown measures. Majority of dental services are not considered essential if renewed lockdown measures are enforced and Q&M Dental Group may have to temporarily shut down operations.

    Singapore Research Team DBS Group Research | Paul YONG CFA DBS Research | https://www.dbsvickers.com/ 2021-04-29
    SGX Stock Analyst Report BUY INITIATE BUY 0.81 SAME 0.81