PHILLIP Securities has downgraded its call on Q& M Dental Group : QC7 -1.72% to &ldquo accumulate&rdquo from &ldquo buy&rdquo , as it foresees negative operating leverage for the dental services provider amid elevated fixed costs.

 

A &ldquo buy&rdquo recommendation suggests projected total returns of over 20 per cent, while &ldquo accumulate&rdquo 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 &ndash which is in line with industry peers &ndash and the group&rsquo s listed associate, Aoxin Q& M Dental : 1D4 -3.2%, at market price with a 20 per cent discount.

 

In a report on Monday (Aug 28), Phillip&rsquo s head of research Paul Chew noted that Q& M&rsquo 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&rsquo s recent expansion in its headcount will support its revenue in H2. 

 

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.

 

&ldquo 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.

 

&ldquo Q& M will suffer from negative operating leverage as fixed costs have elevated.&rdquo

 

Shares in Q& M Dental QC7 -1.72% are &ldquo searching for the bottom&rdquo , says Maybank Securities analyst Eric Ong, after the dental healthcare group posted results for 1HFY2023 ended June that missed consensus forecasts.

 

The group&rsquo s 1HFY2023 net profit of $5.3 million, down 46% y-o-y, missed both Maybank and consensus expectations. While its core healthcare business remains resilient, this was offset by weakening ringgit for its Malaysian operations, higher finance costs and less contribution from medical laboratories, notes Ong.

 

To conserve cash, Q& M reduced its interim dividend per share (DPS) to 0.16 cents, down from 0.4 cents the year before.

 

In an Aug 23 note, Ong stays &ldquo hold&rdquo on Q& M with a lower target price of 31 cents from 37 cents previously.

 

Improving efficiency

 

Q& M aims to improve efficiency to cut costs and wastage, notes Ong. 1HFY2023 revenue from the core healthcare business was down 0.5% y-o-y to $83.3 million, mainly due to steady performance from Singapore dental clinics but offset by weaker sales from its medical clinics in Malaysia, as well as unfavourable foreign exchange impact of a strong Singapore dollar against the ringgit.

 

See also: Q& M reports 46% lower earnings of $5.3 mil in 1HFY2023 as medical lab segment sees lower demand for Covid-19 testing

 

Meanwhile, medical laboratory turnover fell 46.6% to $3.8 million due to less PCR testing. To mitigate rising staff and rental costs, the group plans to use central purchasing to cut wastage, and ensure more just-in-time ordering so that it can also reduce storage cost to improve efficiency, says Ong.

 

To achieve higher productivity and organic growth, Q& M aims to recruit more dentists, especially for its top-performing clinics.

 

It is also trying to develop and optimise its digital AI-guided clinical decision support system to provide more effective and suitable treatment plans for patients, according to management.

 

&ldquo While this may cater to the growing demand for high-value specialist dental healthcare services, we think gestation losses in this venture could continue to weigh on its earnings in the near term,&rdquo says Ong.

 

Post-pandemic pivots

 

Post-pandemic, Q& M is developing new tests for other medical purposes. Its medical laboratory business, Acumen Diagnostic, will seek to develop a new range of tests and solutions to maximise its intellectual property and research capabilities for various medical purposes, says Ong.

 

These include tests for sepsis, identification of bacteria pathogens and their associated antimicrobial resistance in hospitalised pneumonia.

 

&ldquo To be conservative, we have yet to assume any potential income stream from this pipeline given the lack of clear visibility on commercialisation and/or timeline,&rdquo adds Ong.

 

Ong cuts his FY2023-FY2025 earnings per share (EPS) forecasts by 25%-34% on slower dental topline growth, exacerbated by negative operating leverage.

 

At the end of 1HFY2023, EPS on a fully diluted basis stood at 0.56 cents. Ong&rsquo s forecasts place Q& M&rsquo s core EPS at 1.1 cents, 1.3 cents and 1.5 cents for FY2023, FY2024 and FY2025 respectively.

 

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Instead of Q& M, Ong prefers Raffles Medical BSL 0.00% within Singapore' s healthcare sector, with a &ldquo buy&rdquo call and $1.65 target price.

 

Meanwhile, CGS-CIMB Research is keeping &ldquo add&rdquo on Q& M with a lower target price of 35 cents from 42 cents previously.

 

Q& M is contemplating the early repayment of its outstanding loans as higher finance costs have eroded its profitability, note CGS-CIMB analysts Tay Wee Kuang and Kenneth Tan.

 

With Q& M&rsquo s &ldquo healthy&rdquo cash balance of $33.4 million, Tay and Tan think that an early repayment of its borrowings would be an efficient way to improve profitability amid a higher-for-longer interest rate environment.

 

That said, this could translate into subdued dividend payments in the near term, as reflected in its 1HFY2023 DPS, add Tay and Tan.

 

CGS-CIMB is taking into account Q& M&rsquo s slower growth as a result of its shift to focus on cost management and operational efficiencies. Q& M&rsquo s valuations remain &ldquo undemanding&rdquo at 17x P/E for 2024, at 1.5 standard deviation below mean.

Q& M DENTAL group on Monday (Aug 14) posted a 46 per cent fall in its net profit for the first half of the year ended June 2023 to S$5.3 million, from S$9.8 million a year ago.

 

Revenue shrank 4 per cent to S$87.1 million in H1 2023, from S$90.9 million last year.

 

The decline was attributed to a lower contribution to its Singapore medical clinics, coupled with the impact of the weakening ringgit for the group&rsquo s business in Malaysia. Its Singapore dental clinics, on the other hand, had higher revenue contributions.

 

Q& M&rsquo s other segment in the medical laboratory business also faced weaker demand for Covid-19 testing.

 

Earnings per share fell to 0.56 Singapore cent from 1.05 Singapore cents.

 

The company declared a first interim dividend of 0.16 Singapore cent per share, to be paid on Sep 13 after books closure on Aug 30.

 

Dr Ng Chin Siau, group chief executive of Q& M, said the company will focus on &ldquo organic growth&rdquo , following &ldquo significant expansion&rdquo of its dental clinic network across Singapore and Malaysia in 2022.

 

&ldquo We will continue to invest in technology and implement strategies that will enable us to further optimise productivity across our clinic network.&rdquo

 

In their March 15 report, the analysts have lowered their target price to 36 cents from its previously recommended 40 cents.

 

DBS Group Research analysts Tabitha Foo and Paul Yong have maintained their &ldquo hold&rdquo call on Q& M Dental Group (Singapore) QC7 0.00% as they see headwinds such as the reopening of borders and the group&rsquo s gestating assets to remain a drag on their earnings.

 

In their March 15 report, the analysts have lowered their target price to 36 cents from its previously recommended 40 cents.

 

They have also lowered their earning estimates for FY2023/2024 to 9%/18% due to an underperforming 4QFY2022, a larger-than-expected impact from border reopening, sustained losses in its artificial intelligence (AI) initiatives, and a lower contribution from its Acumen business.

 

&ldquo Challenges in AI initiative and Acumen business to persist more clarity needed on these before we turn positive,&rdquo say the analysts.

 

The analysts&rsquo lowered target price is based on a sum-of-the-parts formula that values Q& M&rsquo s core dental business at 18x of its blended FY2023/FY2024 blended earnings. The target price also values Q& M&rsquo s subsidiary, Aoxin Q& M, at its market value.

 

To them, their valuations seem &ldquo fair for now at [around] 19x FY2023 P/E, which is [around] 0.75 standard deviations (s.d.) below its five-year pre-Covid-19 historical average.&rdquo

 

Despite having 10 new clinics in Singapore, Q& M Dental Group has only seen a 2% y-o-y growth in FY2022. Analysts believe that the outflow of dental patients to neighbouring countries like Malaysia and Thailand for treatment will continue, reverting to pre-Covid-19 trends.

 

Q& M&rsquo s AI initiative began back in 2021, when a subsidiary called EM2AI was set up to create an AI platform to prevent misdiagnoses and provide a transparent treatment plan for patients. However, the analysts note that there have been challenges in the development and optimisation of the AI initiative.

 

&ldquo We project more losses to come and estimate it could take around three years for a turnaround,&rdquo they say.

 

Despite external factors driving the analysts&rsquo conservative take, they anticipate a more positive outlook in the future.

 

Q& M Dental Group has the largest network of private dental outlets in Singapore, with 107 dental clinics accounting for around 10% of the market share and an expanding presence in Malaysia and China.

 

Analysts believe that it can leverage on its strong branding, customer retention and recruitment of dentists to capture further market share gains in its core dental business, which continues to be its key earnings driver.

 

While the number of dental clinics in Singapore and Malaysia will remain unchanged, the revenue per clinic will be raised slightly to factor in the addition of new dental chairs in existing clinics and the recruitment of new dentists.

 

&ldquo We remain conservative on other segments and prefer to take a wait-and-see approach until we are more certain about a favourable turnaround,&rdquo they say.

Analysts have all lowered their target price estimates for Q& M Dental Group QC7 0.00%   after the group&rsquo s 4QFY2022 loss stood below their estimates. Q& M Dental, on March 2, reported a loss of $2.2 million for the quarter ended Dec 31, 2022. For the FY2022, the group&rsquo s earnings fell by 63% y-o-y to $11.3 million.

 

CGS-CIMB Research analysts Tay Wee Kuang and Kenneth Tan have lowered their target price to 42 cents from 45 cents previously as Q& M&rsquo s net loss during the 4QFY2022 missed their estimates. The group&rsquo s core net profit of $2.9 million for the quarter, which brought its FY2022 core net profit to $16.5 million, also stood lower than Tay and Tan&rsquo s expectations at 90.0% of their full-year estimates.

 

In their report dated March 9, Tay and Tan note that the group will be initiating &ldquo a strategy of intensive organic growth&rdquo by expanding its team of dentists.

 

&ldquo [This is] likely to optimise operations in existing dental clinics as Q& M&rsquo s FY2022 revenue growth of 2% y-o-y did not match its pace of clinic openings,&rdquo they write.

 

&ldquo In FY2022, Q& M opened 16 dental clinics across Singapore and Malaysia to bring total dental and medical clinics to 157 outlets from 141 outlets a year ago. We understand that the shortage of nurses also impacted operations during FY2022, but Q& M shared that it has since been able to recruit additional nurses,&rdquo they add.

 

That said, Tay and Tan are less upbeat on the group&rsquo s non-core businesses as they anticipate losses to extend into the FY2023.

 

&ldquo [This is] as Q& M ramps up the development of EM2AI for future commercialisation, offset by higher contribution from Acumen, due to its management of a Joint Vaccination and Testing Centre (JVTC) till end-FY2023 while rolling out new diagnostic tests,&rdquo they write.

 

Following this, the analysts have also cut their earnings per share (EPS) estimates for the FY2023 and FY2024 by 3.2% and 7.3% respectively, which led to the lowered target price.

 

That said, Tay and Tan are still remaining upbeat with their &ldquo add&rdquo call as Q& M&rsquo s valuations are &ldquo undemanding&rdquo . At its share price of 35.5 cents as at the analysts&rsquo report, shares in Q& M are trading at a forward P/E of 17x, almost 1.5 standard deviations (s.d.) below the group&rsquo s historical valuation.

To them, re-rating catalysts include stronger revenue momentum, turnaround of associate Aoxin Q& M and higher revenue intensity in existing clinics. On the other hand, downside risks include sluggish dental demand and larger-than-expected costs for gestating assets.

 

Maybank Securities analyst Eric Ong has also lowered his target price to 37 cents from 40 cents previously while keeping his &ldquo hold&rdquo call on Q& M.

 

Like his peers at CGS-CIMB, Q& M&rsquo s 4QFY2022 results also stood below Ong&rsquo s estimates.

 

&ldquo The variance was largely due to [a] decrease in polymerase chain reaction (PCR) testing revenue, as well as write-off of about $5 million relating to its Covid-19 related consumables,&rdquo says Ong.

 

Following Q& M&rsquo s lower-than-expected results, Ong has also cut his EPS estimates for the FY2023 to FY2024 by 15% to 16% on slower-than-expected dental business growth and higher operating expenses (opex).

 

The analyst notes that the group faces headwinds such as increased manpower and occupancy costs, as well as a shortage of trained nurses amid the ongoing inflationary environment.

 

&ldquo Management articulated that it will now focus on improving the utilisation and productivity of existing clinics (for e.g., adding more dental chairs) to expand margins instead of network expansion going forward,&rdquo he says.

 

On Q& M&rsquo s investment in data-centric artificial intelligence (AI) treatment, Ong sees this as a potential next-growth catalyst that &ldquo caters to the rising demand for primary and high-value specialist dental healthcare services&rdquo . However, &ldquo we think continued investments in this area may likely weigh on its earnings in the near-term,&rdquo Ong adds.

 

On Q& M&rsquo s Acumen Diagnostics aiming to progressively roll out its pipeline of new PCR tests, Ong is not assuming any revenue contribution from this new segment given the &ldquo lack of visibility on commercialisation and timeline&rdquo .

 

Ong&rsquo s new target price is based on an FY2023 P/E of 22x.

Q& M Dental QC7 0.00%   has reported a loss of $2.2 million for the 4QFY2022 ended Dec 31, 2022, down from the earnings of $3.2 million in the same period the year before.

 

The earnings decline was primarily due to the lower Covid-19-related revenue.

 

For the FY2022, earnings fell by 63% y-o-y to $11.3 million due to impairments and a decrease in Covid-19-related revenue.

 

Loss per share for the 4QFY2022 stood at 0.23 cent while earnings per share (EPS) for the FY2022 stood at 1.20 cents.

 

Revenue for the 4QFY2022 fell by 10% y-o-y to $47.8 million as revenue in both segments fell. Revenue for dental and medical clinics fell by 1% y-o-y to $43.2 million during the quarter while revenue for medical laboratory and dental equipment & supplies fell by 53% y-o-y to $4.6 million with lesser demand for Covid-19 testing in Singapore.

 

FY2022 revenue fell by 12% y-o-y to $181.2 million as revenue for medical laboratory and dental equipment & supplies fell by 55% y-o-y to $20.3 million. Revenue for dental and medical clinics stood 0.4% higher y-o-y to $160.9 million as Singapore no longer requires Covid-19 testing and government grants were phased out.

 

As at Dec 31, 2022, the group has 107 dental outlets, five medical outlets and one dental college in operations in Singapore, 10 more dental outlets from the year before. It has 44 dental outlets in Malaysia, six more than the year before and one dental outlet in People&rsquo s Republic of China, which stood unchanged.

 

As at Dec 31, 2022, the group has one dental equipment & supplies distribution company and a medical laboratory company in Singapore and one dental equipment & supplies distribution company in Malaysia, unchanged from the year before.

 

As at Dec 31, 2022, cash and cash equivalents stood at $39.7 million.

 

A second interim dividend of 0.6 cent per share was declared for the quarter. This brings the total dividend for FY2022 to 1.0 cent per share. The 4QFY2022 dividend will be paid on March 24.

 

" We are pleased to note that our core healthcare business has continued to demonstrate strong resilience and is well-positioned to grow in the coming year,&rdquo says Q& M&rsquo s CEO Dr Ng Chin Siau. &ldquo We are heartened by the fact that core healthcare&rsquo s revenue and ebitda compound annual growth rate (CAGR) for the last five years (FY2018 to FY2022) are 9% and 26% respectively. We believe that with the strategies that we are implementing, this will continue to be the case.&rdquo

 

&ldquo The group had been very nimble in the Covid-19 period, treating and reacting to threats as opportunities with resulting outstanding results. As we transition to a &lsquo living with Covid-19&rsquo stance now, long term growth will be driven by improved utilisation of our professional staff, optimising the use of clinics and improving margins,&rdquo he adds.

 

&ldquo The key to this approach is continuing training and upgrading of our dentists and professional assistants and use of technologies,&rdquo he continues. &ldquo The group is very well placed to implement these strategies with the Q& M College of Dentistry, our investments in technologies and an experienced management team, which has led the exponential expansion of our core businesses.&rdquo

 

Looking ahead, Ng says the group will &ldquo continue to prioritise in investing in our people as they are the bedrock upon which our long term success lies&rdquo .

 

&ldquo We see the future of dentistry lying in combining the dentist' s domain expertise and valuable experience with data-centric analysis to generate objective and highly accurate dental healthcare plans that are specifically tailored to individual needs&hellip Whether frontline or behind the scenes, [our people] play a vital role in ensuring that we deliver the best dental healthcare to our patients, every single day,&rdquo he says.

 

In its outlook statement, the group says it will embark on a strategy of intensive organic growth of dental clinics with an expanded team of dentists to support the future growth of its operations in Singapore. The group is also actively exploring opportunities to expand its dental business to Southeast Asian countries at this time.