Brokers' take: UOBKH initiates 'buy' on Aoxin Q&M with S$0.37 target price

AOXIN Q&M 1D4 is expected to see a strong turnaround on its earnings after its recent acquisition of Acumen Diagnostics and improved performance from its China dental business, according to UOB Kay Hian (UOBKH).

The research house has started coverage on the dental equipment and services provider with a "buy" call and target price of S$0.37. This is pegged to 16 times FY2022 price-to-earnings (P/E) ratio, based on a 20 per cent discount to its parent company Q&M Dental's QC7 historical mean P/E due to a shorter profitable track record, in UOBKH's view.

In an initiation report on Friday (Nov 19), analyst John Cheong said Aoxin's current valuation of 11 times FY2022 P/E ratio is "attractive" because of its strong growth profile, noting that the company's peers are trading at 32 times FY2022 P/E ratio.

Aoxin has a 49 per cent stake in medical technology company Acumen and currently operates 16 dental centres in 8 cities across China's Liaoning province. Cheong estimates that Acumen's maiden earnings and improved performance from Aoxin's dental centres, which could see contributions of around 6 million yuan (S$1.3 million), will lead to a strong turnaround in group earnings in FY2022. (see amendment note)

According to the analyst, there is "room for growth" in China's dental services industry, where private hospitals are on the rise due to increasingly favourable government policies.

He notes Acumen's expertise in providing research and development (R&D) services to support the pharmaceutical industry and biomedical sciences research.

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Besides Covid-19, Acumen has also contributed R&D services to other diseases, such as the testing of sepsis and vaccine for dengue. According to Cheong, successful commercialisation of the test and vaccine could provide new revenue streams for Aoxin.

Acumen has a "respectable market share" of the polymerase chain reaction testing business and could potentially expand into the "lucrative" ART (antigen rapid test) testing business as well, said Cheong.

Given the frequency of ART testing among the masses and how it has become the preferred mode of testing, Cheong sees a possibility in demand for ART experiencing significant growth.

"Based on an estimated 10 per cent market share and a 40 per cent net margin, this new business could contribute an additional S$9 million to Aoxin's 2022 earnings, potentially lifting 2022 earnings by another 80 per cent," said Cheong.

The counter closed at S$0.26 on Friday (Nov 19), down S$0.01 or 3.7 per cent.

READ MORE:

• Aoxin Q&M to acquire 49% stake in Acumen Diagnostics for S$29.4m through issue of new shares
• Aoxin Q&M's acquisition will raise its exposure to PCR testing demand: Deputy CEO

Amendment note: An earlier version of story incorrectly stated that Acumen operates 16 dental centres in Liaoning, when it is Aoxin. The story has been revised to reflect this.