Q&M Dental Group - UOB Kay Hian 2021-06-29: Twin Growth Engines From Dental & COVID-19 Testing Businesses

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

Q&M Dental Group - Twin Growth Engines From Dental & COVID-19 Testing Businesses

Q&M Dental Group is on track for record core earnings in 2021 (+68% y-o-y) as its dental business delivers robust growth from aggressive opening of new dental outlets and strong local demand. Also, Q&M Dental Group has a new growth engine from the COVID-19 testing and test kit business.
Currently, the stock is trading at 1 standard deviation below its long-term mean of 16x 2022F P/E and offers a dividend yield of 5.2%.
We initiate coverage on Q&M Dental Group with a BUY and a target price of S$0.94 pegged to 20x 2022F P/E (mean P/E).

Started in 1996, Q&M Dental Group (SGX:QC7) is the largest operator of private dental outlets in Singapore, with an extensive network of 85 dental outlets and about 10% market share. Q&M Dental Group also operates 36 dental outlets in Malaysia.
The three key segments of Q&M Dental Group are:
1. dental clinics (92% of 2020 revenue),
2. its dental equipment distribution (6%), and
3. its COVID-19 test kits and laboratory tests (2%).
Despite the COVID-19 pandemic, Q&M Dental Group's dental business delivered robust revenue growth of 26% h-o-h in 2H20 and 41% y-o-y in 1Q21. We believe this was due to aggressive expansion with new outlets since 2019.

Q&M Dental Group started this business in Sep 20 when Acumen MOH revealed that the average daily number of swab tests over the previous week had increased substantially to about 89,000. This is almost triple the number from Feb 21. Q&M Dental Group currently has capacity to do 6,000 tests per day.

We expect the core earnings of Q&M Dental Group to grow by 68% y-o-y to S$33m, driven by:
1. 18% y-o-y core earnings growth from its dental business as a result of 10 new outlets a year (+12% y-o-y) as well as strong demand from local patients, and
2. maiden earnings contribution of about S$10m from the COVID-19 testing business, assuming 2,200 tests per day at the rate of S$70 per test.

Q&M Dental Group has been increasing its dental down in 2020 due to the COVID-19 pandemic. For 2021-23, we assume that Q&M Dental Group will add 10 new outlets in Singapore each year.

Education Minister Lawrence Wong highlighted at the Singapore Perspectives 2021 conference in Jan 21 that the COVID-19 also required to take a PCR test. Also, workers from the construction, marine and process sectors are required to undergo routine testing every 14 days.

We expect Q&M Dental Group’s core earnings to grow 68% y-o-y to S$33m in 2021, driven by two other hand, we expect Q&M Dental Group to record a strong maiden earnings contribution of about S$10m from the COVID-19 testing business, assuming 2,200 tests per day at the rate of S$70 per test.
Risks include:
1. stringent lockdown measures due to execution risk in expanding the number of outlets; and
2. inability to efficiently manage operating costs.

Initiate coverage on Q&M Dental Group with BUY call and target price of S$0.94, pegged to 20x 2022F P/E, its historical five-year average.
We think current valuations of 16x 2022F P/E for Q&M Dental Group and dividend yield of 5.2% are growth and leadership position in the niche dental industry. See the 17-page report attached below for complete analysis on Q&M Dental Group (SGX:QC7). Compared with its peers, Q&M Dental Group offers higher growth, ROE and dividend yield.
See

Earnings surprise due to better-than-expected dental and COVID-19 testing businesses.
Better-than-expected dividend.
Value unlocking activities or takeover offer.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-06-29

SGX Stock Analyst Report BUY INITIATE BUY 0.94 SAME 0.94