PHILLIP Securities has downgraded its call on Q&M Dental Group : QC7 0% to “accumulate” from “buy”, as it foresees negative operating leverage for the dental services provider amid elevated fixed costs.

A “buy” recommendation suggests projected total returns of over 20 per cent, while “accumulate” points to a lower return band of 5 per cent to 20 per cent.

The research house has cut its price target on the stock to S$0.34 from S$0.47, after reducing its FY2023 Patmi (profit after taxes and minority interests) estimates by 34 per cent to S$11.9 million, assuming lower revenue and higher operating expense assumptions.

It values the mainboard-listed group at 25 times price-to-earnings based on FY2023 estimates – which is in line with industry peers – and the group’s listed associate, Aoxin Q&M Dental : 1D4 0%, at market price with a 20 per cent discount.

In a report on Monday (Aug 28), Phillip’s head of research Paul Chew noted that Q&M’s earnings for the first half fell short of expectations as the group came under operating cost pressures from higher staff costs, utilities, rent as well as finance and development expenditure.

Nonetheless, Chew believes the group’s recent expansion in its headcount will support its revenue in H2. 

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He also highlighted how the group has not opened any new clinics this year, as it aims to improve the utilisation of its existing clinics with additional dentists and improved skill sets, especially for the loss-making outlets.

“After building out a record 34 clinics or 30 per cent more, Q&M needs to raise profitability by recruiting new dentists to fill its existing chain of clinics, installing new equipment and upgrading the poorer-performing dentists.

“Q&M will suffer from negative operating leverage as fixed costs have elevated.”

Shares of Q&M were trading unchanged at S$0.29 on an ex-dividend basis as at 9.55 am on Monday.