No reprieve amid reduced Covid-19 cases
- Core net profit was below expectations at 33.3%/36.7% of our/consensus estimates on sluggish growth of core dental business and higher expenses.
- No interim dividend declared. We believe QNM could be rationalising business plans as profits normalise.
- Reiterate Add with an unchanged TP of S$0.73 while we await more details at the analyst briefing on 18 Aug 2022.
Meeting expectations a tall order as tailwinds peter out
Core net profit of S$9.7m in 1H22 was a 45.3% decline yoy, missing our/consensus FY22F estimates at 33.3%/36.7%. This was a result of slow revenue momentum as sluggish dental core revenue growth was insufficient to compensate for reduced Covid-19 testing revenue, which trailed off as Singapore relaxed testing requirements. Hence, revenue declined 3.9% yoy from S$94.6m in 1H21 to S$90.9m in 1H22, 44.6%/46.0% of our/consensus FY22F estimates, while incremental costs from new clinic openings as well as price competition within the Covid-19 testing space weighed on profitability. Consequently, EBIT margin declined 11.1% pts to 14.9% in 1H22 from 26.1% a year ago.
Dental revenue grew in 2Q22 despite slowdown in SG dental visits
QNM observed a small win in 2Q22 as revenue from its dental and medical clinics rose marginally by 1.5%/4.8% qoq/yoy to reach S$39.3m in the quarter. This is amid lower dental clinic visits throughout 1H22, as latest data from the Ministry of Health (MOH) show visits to dental clinics declined for a second month in June 2022 (Fig 2). We think that while there could some seasonality involved with border reopening and the holiday period in 2Q22, it highlights the fact that locals still view dental treatment in Singapore as discretionary in nature. Nevertheless, QNM’s ability to grow revenue suggests expanding market share, likely the result of its plan to continue opening more dental clinics. However, profitability could be affected as its clinic footprint grows.
Quarterly dividend halted
No quarterly dividend was declared for 2Q22, the first time since 1Q21. This comes as its cash balance declined qoq from S$43.5m to S$35.2m and net gearing increased from 0.4x to 0.5x. We think QNM could be rationalising its use of cash considering its intended expansion into other Southeast Asian countries, investments into its Artificial Intelligence (AI) system and rollout of new PCR tests on top of its ambitious plans to undertake 30 new clinic openings per year (20 in Singapore and 10 in Malaysia).
Reiterate Add but wait out on clarity ahead
Our TP of S$0.73, based on 22x FY23F earnings, is unchanged as we await more guidance at QNM’s analyst briefing, which will be held on 18 August 2022. Re-rating catalysts include strong pick-up in dental services revenue while downside risks include drastic changes to dividend guidance.