Brokers' take: CGS-CIMB initiates coverage on Q&M with 'add', S$0.92 target price

CGS-CIMB has initiated coverage on Q&M Dental Group with an "add" rating, citing its "almost recession proof" dentistry franchise, and earnings growth from its new Covid-19 diagnostic testing segment.

The brokerage has issued a target price of S$0.92 for the mainboard-listed counter. Shares of Q&M closed up 2.3 per cent at S$0.66 on Wednesday.

Despite headwinds from Covid-19, the group recorded top-line growth of 7.5 per cent year on year (y-o-y), while core profit excluding government grant came in at S$12.2 million for FY2020, up 44.6 per cent from a year ago.

"As such, we view the group's resilient business model favourably," wrote CGS-CIMB analysts Lim Siew Khee, Cezzane See and Kenneth Tan in a research note on Tuesday.

The analysts estimate the group's dental segment revenue to grow 31 per cent to S$166 million for FY2021 and to rise 16.3 per cent to S$192 million for FY2022.

The brokerage also likes Q&M for its "strong market position" in the Singapore private dental space. Within the Republic, the group has grown from 56 outlets in 2012 to 83 outlets in 2020. This represents about 10 per cent of the total number of private dental outlets in Singapore as at end 2019, the analysts noted.

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They added that a "conservative forecast" includes Q&M adding 10 new outlets in Singapore per annum in FY2021-2023 as uncertainties from the Covid-19 situation remain.

"We expect management to ramp up its expansion plans in FY2021-2022, taking into consideration the rising demand for dental services, as well as dampened outlet growth observed in FY2020 due to the pandemic," CGS-CIMB said.

In addition, a key catalyst is net profit growth from Q&M's new Covid-19 diagnostic testing segment, which could contribute about 38 per cent of the group's core net profits for FY2021-2022, going by the analysts' projections.

"The new segment of Covid-19 testing and sale of test kits via its 51 per cent-owned subsidiary Acumen Diagnostics could continue to be in high demand for FY2021-2023 given the highly infectious and resilient nature of Covid-19," they said.

CGS-CIMB estimates a two-year core net profit compound annual growth rate of 74 per cent for Q&M, as well as free cash flow of S$26 million after incorporating expansionary capex and a dividend payout of 60 per cent.

This translates to a forecast dividend per share of 2.5 Singapore cents for FY2021 and an "attractive dividend yield of 3.8 per cent", which is above its peers, the analysts said.

The stock currently trades at about 14 times the brokerage's estimates for FY2022 earnings, which is two standard deviations below the historical average since its listing. Valuations are also below its pre-China growth phase trading band of 30 times in 2009-2013, CGS-CIMB added.