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3Q21: Robust Results And Positive Outlook; Confidence In Increased Stake In Acumen

Q&M’s 3Q21 earnings of S$9.7m (+57% yoy) were in line with expectations, 9M21 core earnings met 73% of our full-year estimate. Both dental and medical laboratory delivered robust results. Q&M added 14 new dental outlets (+12% yoy) and has
increased its effective interest in Acumen from 51% to 67%, indicating a strong vote of confidence. We are positive on Q&M’s outlook given its robust expansion plan and strong demand for testing services. Maintain BUY and target price of S$0.78.

• Results in line, 3Q21 earnings grew 57% yoy and generous dividend payout. 3Q21 earnings of S$9.7m (+57% yoy) were in line with expectations, 9M21 core earnings met 73% of our full-year estimate. Both dental and medical laboratory delivered robust results due to strong demand for their services. Revenue contribution from dental and medical clinics increased 5% yoy to S$39m and contribution from the medical laboratory and dental equipment & supplies segment soared 932% to S$18m. In addition, Q & M Dental Group (Q&M) declared an interim dividend of 1.0 S cent (100% payout ratio) for 3Q21, which translates into a full-year dividend yield of around 7%.

• Double-digit expansion of new dental outlets paves way for future growth. Q&M has added 14 new dental outlets (+12% yoy) in the last 12 months. The number of dental clinics in Singapore has grown to 90 as at 3Q21, from 81 as at 3Q20. In Malaysia, the number of dental clinics has increased to 38, as compared with 33 previously. Q&M has also increased its total number of dentists to 270 in 3Q21 vs 250 previously. These new outlets should support our expected double-digit earnings growth in the dental segment.

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• Raising its effective stake in Acumen indicates a strong vote of confidence in the medical laboratory business. Q&M’s associated company, Aoxin, recently acquired a 49% stake in Acumen, raising Q&M’s effective interest in Acumen from 51% to 67%. Acumen’s technical capabilities in molecular diagnostics ranges from research and development, manufacturing, and clinical laboratory testing. Acumen will continue to offer COVID-19 testing by PCR for patients and travellers as Singapore opens its borders, as well as distribute COVID-19 antigen rapid tests (ART). Acumen will also develop a panel of new PCR tests in infectious diseases, sepsis and cancer.

STOCK IMPACT

• Aggressive expansion in the number of new dental clinics from 2019 onwards. Q&M has been increasing its dental outlets in Singapore since 2012. The pace of expansion was slower in 2012-18, with an average of three new outlets a year. In 2019, Q&M started a more aggressive expansion by opening seven new outlets, but the expansion slowed down in 2020 due to the COVID-19 pandemic. For 2021-23, we assume that Q&M will add 10 new outlets in Singapore each year.

• Expect robust growth for 2021 driven by twin engines. We expect Q&M’s core earnings to grow by 68% yoy to S$33m, driven by: a) an 18% yoy core earnings growth from its dental business as a result of 10 new outlets a year (+12% yoy) as well as strong demand from local patients, and b) 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.

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EARNINGS REVISION/RISK

• Maintain earnings forecast.

VALUATION/RECOMMENDATION

• Maintain BUY and target price of S$0.78, pegged to 20x 2022F PE, its historical five-year average. We think the current valuation of 16x 2022F PE for Q&M and dividend yield of 7% are attractive, given that both its key segments will deliver robust growth and leadership position in the niche dental industry. Compared with its peers, Q&M offers higher growth, ROE and dividend yield.

SHARE PRICE CATALYST

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