Brokers' take: DBS initiates coverage on Q&M with 'buy', 81 S cents target price

DBS Group Research has initiated coverage on dental service company Q&M Dental Group with a "buy" call, saying the company is able to sustain a high dividend payout ratio of 90 per cent with an asset-light model and strong cash flow generation ability.

In a report on Thursday, the research house put its target price for the stock at S$0.81, as it noted that the dividend payout ratio at 90 per cent could translate into an "attractive" dividend yield of 7.5 per cent in FY2021.

Based on Q&M's stock price of S$0.61 as at the time of the report, DBS said it was trading at an "undemanding" 14.4 times its projected FY2022 earnings, a -1.5 standard deviation of its historical mean.

The research house highlighted that with approximately 10 per cent of market share, Q&M is the leader in private dental healthcare in Singapore and has room for growth.

It likes the company's "relatively resilient core dental business" and believes Q&M can leverage on its "strong branding, customer retention and recruitment of dentists" to capture more market share. This is in addition to new initiatives such as dental artificial intelligence that would help drive increased market share.

"We assume Q&M will open 20 new dental clinics in Singapore and Malaysia per annum over FY20-22F to drive its growth," DBS said.

Additionally, Q&M's new Covid-19 test kits and lab tests business could provide "substantial" upside to earnings if it pans out well, the research house added. With "relatively conservative" assumptions, it projects this new segment to contribute about 16 to 20 per cent to net earnings in FY2021-FY2022.

Some risks that DBS highlighted include the potential reopening of borders. This is because dental treatments in Johor Bahru and Bangkok are popular with Singaporeans as they are more affordable. Should travel become possible, consumers will not be limited to dental services in Singapore, said the research house.

Q&M shares closed at S$0.625 on Friday, up 0.8 per cent or 0.5 Singapore cent.