Q & M DENTAL GROUP (S) LIMITED (SGX:QC7)
Q&M Dental Group - Pandemic To Endemic Winner
- COVID-19 likely to become endemic, requiring vaccination, testing and surveillance.
- Polymerase chain reaction (PCR) tests, the gold standard, unlikely to be replaced.
- Continued border closures, especially to countries around the region, to boost core dental business.
- Maintain BUY rating on Q&M Dental (SGX:QC7) with higher target price of S$1.00.
COVID-19 endemic requires vaccination, testing and surveillance.
- With health experts globally suggesting that COVID-19 is very likely to become endemic, the world must be prepared to live with COVID-19. Singapore is no exception. Our task force ministers have expressed that the aim is to minimise the risk of large clusters forming as zero infections is impossible given the high transmissibility of the virus. While vaccination is key, testing and surveillance play a big role in this ring-fencing strategy that Singapore has adopted.
The possibility of reinfections from new variants shows that testing is still necessary after vaccinations.
- Though leading COVID-19 vaccines have high efficacy rates, no vaccine is 100% effective and breakthrough cases are still possible. People who are fully vaccinated against COVID-19 can still get infected with the Delta variant. In Israel and the UK, we can see that the number of COVID-19 cases had been trending downwards with the successful vaccine rollout from Jan to May 2021, but the tables have since turned. Lauded for having the fastest vaccine roll-out in the world just a few months ago, Israel now battles a new resurgence of cases driven by the Delta variant (~1,000 daily new confirmed cases on 21 July) and has started to reimpose restrictions again. It was found that most of Israel’s new coronavirus infections are now those who have been vaccinated.
- Similarly, the UK has one of the highest vaccination rates in the world, yet it is seeing a surge in cases (~48,000 daily new confirmed cases on 21 July) largely attributed to the Delta variant. Although vaccinations can help lessen the severity of symptoms, this highlights a worrying concern that the virus can still continue to proliferate even in places where large portions of the population have been vaccinated, further emphasising the need for testing after vaccinations to quickly detect and isolate reinfected individuals. As Singapore ramps up its vaccination drive, we believe that testing will still be a crucial tool even after herd immunity is achieved. In fact, Singapore’s shift towards testing will become more preventive.
Asymptomatic transmission proves that testing is needed to limit the spread of COVID-19.
- Infected people can transmit the virus despite being asymptomatic, resulting in the spread of the virus being undetected. Large outbreaks could then emerge and appear ‘sudden’ when they had been in silent transmission before that. According to an article published in the Infectious Diseases Society of America (IDSA) Journals, it was found that routine testing substantially reduces risk of outbreaks but may need to be as frequent as twice weekly.
- In Singapore, following the emergence of one of the biggest COVID-19 clusters at Tan Tock Seng Hospital (TTSH) in May, Singapore General Hospital (SGH) said that no amount of stringent measures can keep the coronavirus out of the hospital if silent infections are not rooted out. To minimise this “silent spread”, rostered routine testing has been implemented in Singapore for workers who are in high-risk environments, underscoring the importance of frequent testing to reduce outbreaks and keep everyone safe.
Testing remains a key tool if we want to do away with quarantine measures, the showstopper for travel.
- With aviation a key component of the Singapore economy and one of the most impacted sectors, we see a scramble to keep hopes of an air travel bubble alive with talks ongoing unabated. A restart in international travel suggests that we should be prepared to see an increase in the number of cases, necessitating strengthened testing to limit the spread. As testing capacity ramps up and vaccination uptake improves, it allows for the possible removal of quarantine measures which is in line with what travellers want.
- An International Air Transport Association (IATA) survey conducted in Mar 2021 showed that 68% of people agreed that their quality of life has suffered with travel restrictions and 84% of people will not travel if quarantine is required. Going forward, we think that testing will continue to be a key tool and a new norm in a post- COVID-19 world for travelling without quarantine measures.
Polymerase Chain Reaction (PCR) tests, the gold standard for testing, unlikely to be replaced.
- The PCR test is considered the most accurate method and the most sensitive, it has been shown to be able to test low viral load, hence able to detect the presence of the virus before symptoms even appear. While there are increasingly many quick screening tests available in the market, we believe that PCR tests will not be replaced given that accuracy would be prioritised over speed at times. Taking the example when new local clusters emerge, only PCR tests are deployed as the risk is high and it is crucial to identify positive cases accurately so as to ring-fence the cluster and limit community transmission. However, in the situation of pre-event testing (PET) for a large-scale event, speed is prioritised and hence a quick screening tool would be best to pick up any possible infection early.
- With concerns of false positives / negatives affecting accuracy, these quick tests could be used in conjunction with PCR tests but definitely not as the sole form of testing. As borders reopen, we think that PCR tests will continue to be the test of choice as the risk is high and accuracy would be prioritised.
Positive for Q&M’s COVID-19 laboratory testing business.
- As testing becomes the new norm in an endemic world, this bodes well for Q&M Dental’s new revenue stream. Awarded the tender by Health Promotion Board (HPB) for the provision of COVID-19 swab and testing services in May 2021, we see further upside for Q&M Dental as they could get priority in getting allocated more tests by the Singapore government going forward.
- Management has also expressed their intention to ramp up capacity, with one machine estimated to arrive sometime in July that can conduct ~4,000 tests daily with only 4-5 laboratory technicians needed, enabling faster turnaround time. We think that this testing business is exciting, and we raise our projections for the number of daily laboratory tests conducted by Q&M Dental upwards.
Domestic reopening ahead of international travel reopening to drive momentum for core dental business earnings.
- Q&M Dental’s core dental business in Singapore remains as its key earnings driver and it will be further boosted by travel restrictions, especially to countries around the region. The number of confirmed COVID-19 cases in Malaysia (~12,000 daily new confirmed cases on 21 July) and Thailand (~11,000 daily new confirmed cases on 21 July) have surged since May 2021, resulting in continued lockdowns and new restrictions imposed.
- Coupled with the slow vaccination roll-out in both countries, we do not anticipate a reopening of their borders anytime soon, resulting in Singaporeans having to visit local dental clinics instead of travelling for more affordably priced dental services. Under Phase 2 (Heightened Alert) measures in Singapore, dental services are allowed to continue. We believe that dental care is essential to Singaporeans, and thus we remain bullish on Q&M Dental’s core dental business on the back of a bigger pool of local patients.
On track to obtain a significant portion of the dental market pie long-term.
- Management has expressed a clear and aggressive organic growth strategy for its dental business in the next 10 years. The COVID-19 situation has helped to reinforce Q&M Dental’s position in the industry given that they have seen more dentists approaching to join the Group, as the Q&M Dental branding helps to provide a steady stream of customers. year-to-date 2021, Q&M Dental has opened 5 new clinics in Singapore and committed to 9 as at end June 2021.
- With around 10% market share now, 20 new clinics p.a. will enable Q&M Dental to obtain ~30% of the market share in 10 years, assuming 2% annual growth in the market. Going forward, Q&M Dental’s new artificial intelligence (AI) technology will further value-add to its service, increasing customer stickiness.
We raise our target price for Q&M to S$1.00 based on sum-of-the-parts (SOTP) valuation, translating to 19x FY22F P/E.
- We adjust the multiple for the dental business upwards from 22x to 25x given that the stock’s five-year historical average P/E is 27x; and we are confident that Q&M Dental is on track to open 15 new clinics in FY21, meeting our expectations, as well as its ability to increase its market share in the long run. We also raise the multiple for Acumen Diagnostics from 5x to 7x on the back of our conviction in COVID-19 testing becoming a new norm.
- See
- Maintain BUY!
Paul YONG CFA
DBS Group Research
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Singapore Research Team
DBS Research
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https://www.dbsvickers.com/
2021-07-27
SGX Stock
Analyst Report
1.00
UP
0.840
