Q&M Dental Group - DBS Research 2022-08-15: Expansion Plan Delayed; Disappointing 1H22 Performance

Q&M Dental 1H22 Results highlights

• Q&M Dental Group (SGX:QC7)'s revenue fell 4% y-o-y to S$90.9m in 1H22 from S$94.6m in 1H21, mainly attributed to the 28% decline y-o-y in revenue from the medical laboratory and dental equipment & supplies segment.
• Employee benefits expense and depreciation of right-of-use assets increased 20% and 22% y-o-y respectively.
• Profit attributable to Q&M Dental's shareholders declined 45% y-o-y to S$9.9m in 1H22 from S$17.8m in 1H21, partially due to the one-off S$4.4m gain on disposal of Aidite in 1H21. Excluding the one-off gain, profit attributable to shareholders declined ~34% y-o-y.
• No dividend was declared for 2Q22 as Q&M Dental plans to conserve cash for corporate activities and future expansions and guides that they will be paying down bank loans in 3Q22 and 4Q22. (Q&M Dental's Dividend in 1Q22: 0.04 cents per share; Dividend in 2Q21: 1 cents per share).

Q&M Dental Earnings forecasts revision and recommendation

• We cut FY22F/23F earnings forecasts for Q&M Dental by ~30% to S$22.7m/S$26.0m to factor in
  1. lower projections for new clinic openings in Singapore to roughly 10 per year from 15;
  2. slower ramp up to profitability for the new clinics; and
  3. softer forecasts for the Acumen Diagnostics business as demand for COVID-19 testing drops significantly in Singapore.
• We revise Q&M Dental's dividend payout ratio to a conservative 50% for FY22F-24F from S$0.04 per share previously.
• We lower our target price for Q&M Dental to S$0.53 based on sum-of-the-parts (SOTP) as we roll forward to FY23F valuations, implying 20x FY23F P/E.
• Q&M Dental's valuations is fair for now at 18x FY23F P/E, ~0.5 standard deviation below its 5-year average. As our new forecasts assume it will take a few years for Q&M Dental’s bottom-line to reach FY20 levels, valuations seem aligned with its fundamentals currently.
• Downgrade Q&M Dental to HOLD from BUY.
• Where we differ: We remain conservative on the core dental business as we await the ramp up in profitability for the new clinics.