Q& M Dental Group announced that its FY2023 ended Dec 31, 2023 has increased by 2% y-o-y to $11.5 million from $11.3 million last year.

 

Revenue saw a marginal 1% increment to $182.7 million from $181.2 million a year ago.

 

For the 2HFY2023 period, earnings saw a significant 323% jump to $6.2 million from $1.5 million a year ago, while revenue gained 6% y-o-y to $95.6 million.

 

For both the FY2023 and 2HFY2023 periods, the growth was led by the group&rsquo s dental and medical clinics, mainly due to higher revenue contribution from Singapore dental clinics, offset by lower revenue contribution from the group&rsquo s medical clinics, disposal of the Shanghai Chuangyi in June 2023 as well as unfavourable impact of strong Singapore Dollars against Malaysian Ringgit from the group&rsquo s operation in Malaysia.

 

The growth in revenue was partially offset by lower contribution in the group&rsquo s medical laboratory and dental equipment & supplies segment, mainly due to lower revenue contribution from the dental equipment & supplies companies in Singapore and Malaysia offset by higher revenue contribution from the group&rsquo s medical laboratory business.

 

On a geographical basis, Singapore contributed to the group&rsquo s revenue and earnings growth, while the Malaysia and China markets offset that growth and saw lower contributions.

 

As at end December 2023, the group has 105 dental outlets, two less from 107 dental outlets last year, as well as no more dental outlets in China, compared to just one a year ago.

 

Meanwhile, unchanged from the previous year, it also has five medical outlets and one dental college in operations in Singapore, 44 dental outlets in Malaysia, a dental equipment & supplies distribution company and a medical laboratory company in Singapore and a dental equipment & supplies distribution company in Malaysia.

 

As at Dec 31, 2023, cash and cash equivalents stood at $34.0 million.

 

The board has declared a second interim dividend of 0.53 cent per share. Along with 0.16 cent paid out in 1HFY2023, the group would have paid out a total of 0.69 cent per share for FY2023, representing a payout ratio of 57%.

 

Concurrently, the group has announced the results from its 32.8% owned associate company Aoxin Q& M Dental, which is also listed separately on the Singapore Exchange S68 0.21% (SGX). For the FY2023 ended Dec 31, 2023 period, Aoxin Q& M recorded a loss of RMB 47.3 million ($9.0 million), narrowing the losses by 30.1% y-o-y from RMB 67.7 million.

 

Excluding impairment loss on investment in an associate, losses for FY2023 would have narrowed by 94.3% to RMB 431,000 from RMB 7.5 million a year ago.

 

Revenue for the period saw a 33.2% y-o-y increase to RMB 115.9 million, thanks to the recovery from Covid-19 for all business segments of the group.

 

Dr Ng Chin Siau, group CEO of Q& M says: &ldquo We are heartened by the improvement in the numbers overall for FY2023 despite the macroenvironment impact of relatively high inflation rate, high interest rates and a generally challenging business environment. The resilience of Q& M&rsquo s core healthcare business is once again being well-demonstrated and is a testament to strategies and processes we have put in place. We will continue to focus on organic growth within the group&rsquo s strong network in Singapore and Malaysia and also optimising our existing clinics to obtain better outcomes in service and overall productivity.&rdquo

 

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.