4Q21F preview: peek at new baseline
? We believe 4Q21F profit was helped by seasonally stronger dental core business momentum, offset by normalisation of Covid-19 testing contribution.
? Re-rating catalysts: increased scope and commercialisation of services from Acumen Diagnostics; downside risk: reduction in Covid-19 testing intensity.
? Reiterate Add call with a lower TP of S$0.785 as we roll over our P/E valuation to peg to 22x FY23F EPS of 3.58 Scts.
Earnings growth momentum likely eased in 4Q21F
We revise earnings for FY21F/22F downwards by 4%/7% and FY23F upwards by 5% as revenue and margins from Polymerase Chain Reaction (PCR) testing for Covid-19 normalise. We now forecast a swifter decline in testing contribution in FY22F to 60% compared with 40% previously but expect it to be stable going into FY23F. Our revised 4Q21F net profit of c.S$7.4m (+45% yoy, -22% qoq) is a combination of a seasonally stronger dental core business, alongside normalised contribution from PCR testing services. The latter is due to the government’s shift to self-testing for Covid-19 during the fourth quarter. Daily PCR tests conducted during 4Q21 fell to 28.6k/day from 66.4k/day in the third quarter (Fig. 1).
Dental core business underpins long-term growth
In FY21, QNM opened 17 and 4 dental clinics in Singapore and Malaysia, respectively. Although shy of its annual target of 20/10 new dental clinics in each country over the next 10 years, the number of clinic openings tracks well with our forecast 20 clinic openings across the two countries. QNM sees growing contribution from both maturing and new dental clinics supporting double-digit growth in dental core revenues that could translate into higher profits given gestation periods of approx. a year for new dental clinics.
Testing contributions to wane but could eventually stabilise
The number of daily PCR tests has continued to slide to 18.4k/day YTD. However, we expect contributions from Covid-19 testing services to stabilise moving forward as it continues to be an essential healthcare service in a post-pandemic society. QNM has also started to offer supervised ART testing services in its dental clinics, which could benefit from higher volumes as society reopens. Our revised estimates account for a c.60% decline in revenue contribution from Covid-19 testing from an estimated FY21F contribution of c.S$36m to c.S$13.5m for both FY22F/23F.
Reiterate Add on lower TP of S$0.785; valuation remains attractive
We roll forward our P/E valuation to FY23F and continue to peg our TP to 22x forward P/E to account for a size discount vs. other listed healthcare peers with a dental service business. QNM is currently trading at an attractive valuation of 15.2x forward P/E, more than 1 s.d. below its 5-year historical average of 27.2x. Our estimated dividend of 1 Sct in 4Q21F will also bring FY21F dividend to 4 Scts, representing an attractive dividend yield of c.7% at the current price, which we believe will be sustainable moving forward.