Brokers’ take: CGS-CIMB lowers Q&M Dental target price; downgrades to ‘hold’

CGS-CIMB on Friday (Aug 19) downgraded its call on Q&M Dental Group from “add” to “hold”, while lowering its target price on the stock to S$0.44 from S$0.73, on the back of an earnings miss and several near-term challenges. Q&M’s net profit of S$9.8 million for H1 ended June was below CGS-CIMB’s growth expectations at 33.7 per cent of the research house’s FY2022 estimates.  The core dental business saw slower-than-expected growth and the company also had lower operating leverage due to continued investments into its AI (artificial intelligence) guided clinical decision support system, analysts Tay Wee Kuang and Kenneth Tan noted in their report. Q&M’s diagnostics arm, Acumen, has also reversed FY2021’s high profitability and dipped back into losses in Q2, with the relaxation of Covid-19 testing requirements.

While Q&M has organic growth plans, it faces several challenges. “With wage inflation and a tight labour market, Q&M is likely toeing a fine line between balancing profitability and organic growth through clinic expansion,” Tay and Tan said. The analysts have also reduced their dividend expectation for FY2022 from 1.8 Singapore cents to 1 cent, based on Q&M’s current assessment of its capital allocation options. This may include paying down its debt in a higher interest rate environment and undertaking potential growth opportunities.  CGS-CIMB’s revised earnings estimates for Q&M take into account the removal of Covid-19 contributions and slower core dental revenue growth. They note upside risks being stronger growth of core dental revenues and significant commercialisation of gestating assets such as the digital AI systems and new PCR (polymerase chain reaction) test from Acumen.  As at 11:30 am, Q&M Dental was trading at S$0.42, down 1.2 per cent or S$0.005.