Brokers' take: CGS-CIMB maintains 'add' on Q&M Dental with lower target price of S$0.785

CGS-CIMB on Friday (Feb 11) reiterated its "add" call on Q&M Dental Group QC7 with a lower target price of S$0.785 from S$0.835 previously.

The brokerage noted a likely easing in the group's earnings growth momentum for Q4 FY2021, though it said that Q&M's dental core business will underpin the group's long-term growth.

The new target price is a result of CGS-CIMB rolling forward its price-to-earnings valuation to FY2023, and is pegged at 22 times forward earnings, to account for a "size discount versus other listed healthcare peers with a dental service business", it said.

Q&M is currently trading at an "attractive" valuation of 15.2 times its forward price-to-earnings, more than 1 standard deviation point below its 5-year historical average of 27.2 times, according to the brokerage.

CGS-CIMB analysts Tay Wee Kuang and Kenneth Tan reduced their estimates of Q&M's earnings for FY2021 by 4 per cent and FY2022 by 7 per cent respectively, but increased estimates for FY2023 by 5 per cent.

The analysts noted that the revisions are a result of a "normalisation" of revenue and margins from Covid-19 polymerase chain reaction (PCR) testing, due to the government's shift to self-testing for the coronavirus in the fourth quarter of FY2021.

While they forecast a swifter decline in testing contributions in FY2022, the analysts expect this to be stable going into FY2023, as such testing services continue to be an "essential" healthcare service in a post-pandemic society.

"QNM has also started to offer supervised antigen rapid test (ART) testing services in its dental clinics, which could benefit from higher volumes as society reopens," they added.

Both analysts have accordingly revised the group's Q4 FY2021 estimated net profits to about S$7.4 million, helped by "seasonally stronger dental core business momentum" offset by the normalisation of Covid-19 testing contributions.

Growing contribution from Q&M's maturing and new dental clinics will support "double-digit" growth in dental core revenues that could translate into higher profits, given gestation periods of about a year for new dental clinics, they noted.

The group opened 17 and 4 dental clinics in Singapore and Malaysia respectively in FY2021, which the analysts said tracks well with their forecast of 20 clinic openings across the 2 countries.

Both CGS-CIMB analysts also like that Q&M has been improving its environmental, social and governance (ESG) standing over the years, via new social and corporate social responsibility initiatives.

They highlighted the group's contribution to national efforts to combat the pandemic through the provision of Covid-19 testing services and voluntary swabbing services, as well as its establishment of the Q&M College of Dentistry in 2018 to nurture homegrown dental talent.

"We believe the company could attract further investor interest as it expands its ESG profile," they said.

The analysts estimate a dividend of 1 Singapore cent for Q4 FY2021. In their view, this will bring its estimated FY2021 dividend to 4 Singapore cents, representing an "attractive" dividend yield of about 7 per cent at the current price, which they believe will be "sustainable" moving forward.

Shares of Q&M Dental Group closed flat at S$0.565 on Friday.

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