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News Analysis: 1:5 bonus shares have gone ex. TP adjusted to S$0.84

  • Q & M’s shares have gone ex for a 1-for-5 bonus share issuance; bonus shares not entitled to S 1ct dividend
  • Our TP is consequently adjusted to S$0.84
  • We continue to like the stock for its strong core dental business 
  • Maintain BUY

Q & M received in-principle approval for its proposed bonus issue of 160,977,560 new ordinary shares in the capital of the Company, on the basis of 1 bonus share to be credited as fully paid for every 5 existing ordinary shares.Bonus shares represent c.20.45% of the existing issued and paid-up share capital and c.16.98% of the enlarged share capital, assuming there are no changes to the total issued share capital. Bonus shares will not be entitled to the 2nd interim dividend of 1 cent per share to be paid on 3 September 2021. We maintain BUY, with target price adjusted to S$0.84. 

Investment Thesis: Pandemic to Endemic Winner

Key arguments:

  • Maintain BUY with TP adjusted to S$0.84, implying potential upside of 31%. We adjust our TP for the 1-5 bonus issue on 1 September. We like Q&M for its firm core earnings growth trajectory. Valuations are undemanding at FY21F 14.7x P/E (c. -1 SD) with attractive yield of 6.1%.
  • COVID-19 testing is here to stay, positive for Q & M’s COVID-19 laboratory testing business. With health experts globally suggesting that COVID-19 is very likely to become endemic, the world must be prepared to live with COVID-19. We think there are three key reasons why testing will be the new norm in an endemic world: i) possibility of reinfections from new variants; ii) asymptomatic transmission; and iii) allows for the removal of quarantine measures, a showstopper for travel. For international travel to restart, testing will be a key tool. As testing becomes the new norm, this bodes well for Q & M’s new revenue stream.
  • Momentum for core dental business earnings to continue. We see short-term tailwinds from continued travel restrictions while medium-term to long-term prospects are supported by clinic expansion plans and artificial intelligence (AI) technology, enabling Q & M to obtain a significant portion of the dental market pie.
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Valuation:

Maintain BUY and TP of S$0.84, based on sum-of-the-parts (SOTP) valuation method:

A. Primary Healthcare (Dental and Medical Clinics) and Dental Equipment and Supplies Distribution (S$0.69 p.s.): We assign a PE multiple of 25x given that (i). the five-year historical average PE is 27x; and (ii). we are confident that Q & M 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.

B. Aoxin Q & M (associate held by Group) (S$0.04 p.s.): The Group has a 43.48% stake in Aoxin Q & M, which has a market capitalization of S$78.2m and the market value of the stake in Aoxin Q & M is S$33.9m,

C. Acumen Diagnostics (sale of test kits and laboratory testings) (S$0.11 p.s.): We see a PE multiple of 7x as fair on the back of our conviction in COVID-19 testing becoming a new norm in an endemic world.

Sum-Of-The-Parts (SOTP) Valuation
  FY22F (S$)Per share (S$)
Dental business25x26.8m0.69
Aoxin 
Q & M
Market Value78.2m0.04
Acumen Diagnostics 7x15.3m0.11
Total Equity Value  809.5m 
TP  0.840.84
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Where we differ:

We are slightly more optimistic on both the core dental business and Acumen Diagnostics business as we believe Q & M will be able to meet our expectations of 15 new clinics in Singapore in 2021 and that COVID-19 testing will become a new norm in an endemic world. 

Key risks:

The key risks to our view on the stock includes: 1) reopening of borders, 2) execution risks on the core dental business and Acumen Diagnostics, and 3) renewed lockdown measures.