Q&M Dental Group (CSGCIMB Research)

Tender win alleviates short-term pressure

- Diagnostics arm Acumen has won a tender from the Ministry of Health (MOH) to operate a Joint Testing & Vaccination Center (JTVC), said Q&M. The tender, estimated to be worth S$3.6m in revenue, is for a period of 15 months, from October 2022 to December 2023.

- Upgrade from Hold to Add, with TP unchanged at S$0.44, as current valuation of 15x forward P/E (-2 s.d. below 5-year mean) looks attractive.

Acumen likely to return to profitability in FY23F

Q&M estimates a revenue contribution of S$3.6m from the operation of the JTVC, which will commence on 21 Nov 22. We have yet to incorporate the potential earnings impact as the contribution is less significant compared to an estimated contribution in excess of c.S$30m in FY21 from its Covid-19 testing operations.

Nevertheless, we believe that the tender will alleviate Acumen’s short-term woes in commercialising other diagnostic tests given Q&M’s 2Q22 disclosures suggested Acumen recorded c.S$170k in net losses, likely due to the drastic reduction in polymerase chain reaction (PCR) testing for Covid-19 in Singapore during 2Q22.

From our understanding, QNM has since streamlined Acumen’s operations to manage costs while retaining its diagnostics capabilities. The tender could lift Acumen back to profitability and present QNM with an opportunity to expand its offerings to include vaccination services in the future.

3Q22 likely proved resilience of dental core business

We are expecting QNM to report revenue/net profit of c.S$45m/c.S$4.5m in 3Q22. This implies 22%/68% declines yoy due to the peak of Covid-19 contributions resulting in a high base in 3Q21. Stripping off Covid-19-related contributions, revenue run rate was likely comparable both yoy and qoq, which we believe exhibits the resilience of QNM’s dental core business.

Latest data from the MOH also showed that monthly dental visits in July reached more than 82k, recovering from the downtrend observed across 2Q22. QNM’s cost profile is also likely to improve given that employee bonuses, previously recognised only in the fourth quarter in prior years, were accrued for in 2Q22.

Upgrade from Hold to Add with unchanged TP of S$0.44

Our TP of S$0.44 is pegged to 20x FY23F P/E, 1 s.d. below QNM’s 5-year historical mean.

The current share price represents a forward P/E of 15x, close to 2 s.d. below its 5-year historical mean and near its all-time low of 13.7x. We believe valuations have turned attractive for QNM as our FY23F earnings estimates account for negligible contribution from Acumen while expecting continued improvements in its dental core business. Rerating catalysts include stronger-than-expected growth in dental core revenues, extensive government efforts in rolling out bivalent Covid-19 vaccines and significant commercialisation of gestating assets, such as its digital AI system.

Downside risks: largerthan-expected costs for gestating assets and sluggish dental demand.