DBS Group Research analysts Tabitha Foo and Paul Yong have maintained their “hold” call on Q&M Dental Group (Singapore) QC7 as they see headwinds such as the reopening of borders and the group’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.
“Challenges in AI initiative and Acumen business to persist; more clarity needed on these 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 its blended FY2023/FY2024 blended earnings. The target price also values Q&M’s subsidiary, Aoxin Q&M, at its market value.
To them, their valuations seem “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.”
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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’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.
“We project more losses to come and estimate it could take around three years for a turnaround,” they say.
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Despite external factors driving the analysts’ 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.
“We remain conservative on other segments and prefer to take a wait-and-see approach until we are more certain about a favourable turnaround,” they say.
As at 3.34pm, shares in Q&M Dental Group are trading 2 cents lower at 34 cents.
