DBS cuts Q&M Dental’s TP to 36 cents as it sees border reopening and growing assets remain a drag
DBS Group Research analysts Tabitha Foo and Paul Yong have maintained their call to Q&M Dental Group (Singapore)
QC7 as they see headwinds such as the reopening of borders and the group’s growing assets continue to weigh on their earnings.
In their March 15 report, the analysts lowered their target price from the previously recommended 40 cents to 36 cents.
They also downgraded their FY2023/2024 revenue estimates to 9%/18% due to an underperforming 4QFY2022, a larger-than-expected impact from the reopening of borders, continued losses in its artificial intelligence (AI) initiatives and a lower contribution from its Acumen business.
“Challenges in AI initiative and Acumen business remain; more clarity is needed on this before we turn positive,” say the analysts.
The analysts’ lowered target price is based on a sum-of-the-parts formula that values Q&M’s core dental business at 18x of FY2023/FY2024 blended revenue. The target price also values Q&M’s subsidiary, Aoxin Q&M, at its market value.
For them, their valuations appear ‘reasonable for now’ [around] 19x FY2023 P/E, that is [around] 0.75 standard deviations (sd) below the pre-Covid-19 five-year historical average.”
Despite having 10 new clinics in Singapore, Q&M Dental Group has only seen growth of 2% yoy in FY2022. Analysts believe the outflow of dental patients to neighboring countries like Malaysia and Thailand for treatment will continue and return to pre-Covid-19 trends.
Q&M’s AI initiative began in 2021, when a subsidiary called EM2AI was created 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 developing and optimizing the AI initiative.
“We expect more losses to come and estimate it could take about three years for a turnaround,” they say.
Despite external factors driving the analysts’ conservative view, they expect a more positive outlook going forward.
Q&M Dental Group has the largest network of private dental outlets in Singapore, with 107 dental clinics representing approximately 10% of the market share and a growing presence in Malaysia and China.
Analysts believe the company can leverage its strong branding, customer retention and dentist recruitment to achieve further market share gains in its core dentistry business, which remains its main source of revenue.
While the number of dental clinics in Singapore and Malaysia remains unchanged, revenue per clinic will be slightly increased to account for the addition of new dental chairs in existing clinics and the recruitment of new dentists.
“We remain conservative in other segments and prefer to take a wait and see approach until we have more certainty about a favorable turnaround,” they say.
At 3:34 p.m., shares of Q&M Dental Group are trading 2 cents lower at 34 cents.