Managing post-Covid growth expectations

■ 1Q22 revenue/net profit missed our expectations at 21.0%/19.4% of our
FY22F estimates on lower-than-expected dental core revenue.
■ Interim dividend of 0.4 Scts was 60% lower yoy, representing a payout ratio
of 58%, below our 80% payout ratio expectation for FY22F.
■ Reiterate Add with lower TP of S$0.73; cut FY22F/23F/24F EPS by
12%/8%/5% as we temper assumptions for revenue intensity per dental chair.

Dental core revenue normalises from pandemic levels

QNM saw revenue/core net profit grow 6.9%/28.3% yoy in 1Q22, estimated to be driven
entirely by its diagnostics business, i.e. Covid-19 testing, compared to the lower intensity
of the segment a year ago. On the other hand, revenue from its dental and medical clinics
fell 1.6% yoy to S$38.6m despite operating 19 more dental clinics compared to a year ago.
The observed low er dental visits w ere the result of the spike in Omicron cases during the
quarter, which affected QNM’s staff as w ell. However, w e believe the reopening of borders
could have also contributed to the low er revenue intensity, especially given the resumption
of fuss-free travel to Malaysia, allowing patients to cross the border for cheaper dental
services.

Slow start to clinic openings; playing catch up moving forward

While w e expect QNM to offset the weakness in revenue intensity through its aggressive
plans for clinic openings, it only managed to open 2 dental clinics in Singapore and 3 in
Malaysia during the quarter. This is within our expectation of 20 dental clinics opening in
total for FY22F but below the target of 30 set out by the management. The lifting of most
of the restrictive Covid-19 measures should improve business sentiments and spur more
clinic openings but w e expect most of QNM’s clinic openings to only occur in 2H22, which
could partially defer net profit contribution to FY23F.

Dividend cut dampens sentiments; reduce earnings forecasts

QNM announced an interim dividend of 0.4 Scts for 1Q22, a 60% decline yoy that
translates to a payout ratio of 58%. We reduce our dividend expectation from 3.0 Scts each
for FY22F/23F/24F to 1.8/2.0/2.2 Scts by cutting our dividend payout expectation to 60%
from 80% previously and lower our FY22F-24F earnings forecasts by 5-12% on weaker
revenue intensity assumptions and low er margins from the diagnostics business.

Reiterate Add; valuations remain attractive

We reiterate our Add rating with TP lowered to S$0.73, pegged to 22x FY23F P/E. Current
valuations look attractive at 15x forward P/E, 1.5 s.d. below its 5-year average. We believe
the share price could stay subdued in the near term due to expectations of tapering Covid19 testing contribution, a sub-par dental core showing in the first quarter and an annualised
dividend payout of 1.6 Scts compared to 4.0 Scts in FY21. Re-rating catalyst: uplift in dental
core revenue; downside risks: persistent weakness in dental visits and delayed clinic
openings.