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Strong growth momentum in core dental business

  • FY21F/FY22F earnings revised down by 5.3%/6.7%; a 30.5% EPS CAGR over FY20-23F  
  • Reopening of borders a risk but we still expect a solid earnings growth trajectory for core dental business
  • Acumen Diagnostics to continue PCR testing for COVID-19, despite some pressure, but a pivot to ART test kits could provide upside
  • Maintain BUY with lower TP of S$0.80
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Investment Thesis: 
Maintain BUY with lower TP of S$0.80, implying potential upside of 32%. We lower our FY21F/FY22F earnings forecasts for Q & M by 5.3%/6.7% as we cut our COVID-19 PCR testing projections; the EPS CAGR over FY20-23F stands at 30.5%. FY21F valuations remain undemanding at 15x PE (c. 1 SD below five-year average) with an attractive yield of 6.1%, as Q & M has continued to pay a quarterly dividend of 1 Sct even after the bonus issue.   

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Focus on Q & M’s core competency. We continue to like Q & M’s dental business and expect a solid earnings growth trajectory, as it is on track to meet our projection of 20 new clinics a year. We think that demand for Q & M’s dental services is unlikely to drop significantly even as borders reopen, as the inconvenience of travelling, i.e., the need to test at the borders, additional costs of testing, and fear of contracting the virus overseas is likely a deterrent for many.
Acumen could see PCR testing demand for COVID-19 ease but they are already planning for a pivot to ART test kits, which could provide upside to our forecasts. There is a shift towards ART in Singapore, as it is not only cost-effective and readily available, but also very sensitive to the highly transmissible Delta variant. Selling ART kits is a potential opportunity for Acumen since they have done so before and no new machinery is needed. We see upsides to our forecasts with this pivot to ART test kits, which will see huge volumes. 

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Valuation:

Maintain BUY with lower TP of S$0.80 based on sum-of-parts valuation: 1) core dental business at 25x FY22F earnings (S$0.69 per share), 2) subsidiary Aoxin Q & M at market value (S$0.04), and 3) Acumen Diagnostics business at 5x (S$0.06).

Where we differ:

We are slightly more optimistic on Q & M on the back of a strong earnings trajectory for its core dental business. 

Key Risks to Our View:

Reopening of borders and execution risks.

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