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Refocusing on its core dental business

  • 3Q21 net profit of S$9.5m beat our estimate of a S$8.6m run rate per quarter in 2H21F by 10% on the back of higher margins.
  • We raise FY21F EPS by 3% but cut FY22F-23F EPS by 6-18% to reflect lower PCR test revenue moving forward.
  • Reiterate Add with a slightly lower TP of S$0.835, still pegged to 22x 2022F P/E (c.15% below peers). Attractive dividend yield of c.6.5% at current prices.
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Strong PCR test income in 3Q21 augmented stable dental business

Higher operating margin of 61% from dental equipment and supplies distribution segment vs. 51% in 2Q21 boosted its revenue momentum in 3Q21. 9M21 revenue of S$22.9m was at 71% of our and 72% of Bloomberg consensus’ full-year estimates. We deem this in line as we expect a stronger 4Q21F, supported by high PCR test contribution and strong seasonal revenue from dental services. On average, 4Q revenue from QNM’s dental and medical clinics segment made up 27.4% of its total annual revenue in FY17-FY19. We believe the use of dental benefits from corporate/individual healthcare policies before their year-end expiry is the key reason why 4Q is a peak season for this unit.

PCR testing intensity to taper despite strong third quarter

Singapore experienced a surge in Covid-19 cases in 3Q21. Laboratory operators like QNM likely benefited from being deployed to conduct swab operations in temporary testing stations. However, the number of daily PCR tests has since fallen 75% from the average of 66.5k/day in 3Q21 to 16.6k/day as of 8 Nov (Fig 3). We lower our forecast on the revenue contribution of the dental equipment and supply distribution segment by 37% for FY22F and 62% for FY23F, with a less-than-proportionate decrease in its revenue compared to the decline in national PCR testing numbers as we think the high positivity rates provides less scope for test pooling.

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Opening of new dental clinics well underway

QNM has opened seven dental clinics in Singapore YTD and is committed to opening nine more clinics by year-end, having already signed the tenancy agreements for them. This is roughly in line with our expectation that QNM will open 15 new clinics this year in Singapore. As macroeconomic conditions stabilise, QNM could resume its plan of opening 30 new dental clinics per year for the next 10 years in Singapore and Malaysia. We conservatively forecast the opening of 22 clinics in FY22F, and 20 in FY23F.

Attractive dividend yield; reiterate Add

This report marks the transfer of QNM’s coverage to Tay Wee Kuang. We reiterate our Add call with a slightly lower TP of S$0.835 to reflect weaker PCR testing contribution ahead. QNM’s dividend payout of 1 Sct for 3Q21 brings 9M21 payout to 3 Scts. Our revised FY21F dividend payout of 4 Scts (from 3.4 Scts) represents an attractive dividend yield of c.6.5% at current prices. A higher number of new clinic openings could re-rate the stock. Downside risks include a sharper decline in Covid-19 testing contribution.