• 2023 adjusted PATMI exceeded our expectations at 121% of forecasts. Operating margins recovered from higher revenue per patient and more stable employee expenses. Associates also turned around from losses the prior year.
• Q&M is rationalising their network of clinics and closing poor performing clinics. Revenue intensity per patient is raised by utilising its EM2AI software. Data is drawn from dental scans, medical notes and records to ascertain the necessary level and timeliness of the treatments for patients. We view EM2AI as a critical tool for efficiency and differentiation.
• We upgraded from ACCUMULATE to BUY and raised our target price to S$0.36 (prev. S$0.34). We value the company at 20x PE FY24e earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.051, Not Rated) is valued at market price with a 20% discount. We expect Q&M to return to growth in FY24e. The key drivers are higher revenue per patient, more stable employee cost (as staffing levels for nurses normalise), deconsolidation of EM2AI R&D expenses and turnaround in associates.

The Positive

+ Recover in revenue and margins. 2H23 revenue growth is the fastest over the past two years. Despite fewer clinics, revenue expanded from higher revenue per patient. Using data driven treatment, Q&M can ascertain and provide a more intensive treatment for patients. Margins recovered from operating leverage and a stable number of staff or nurses.

The Negative

- Declining number of clinics. 2023 saw the first decline in the number of clinics in six years. Q&M closed two clinics in Singapore. The restructuring was to close loss-making clinics. Q&M is still looking to expand its clinics but for larger sites.  

• 1H23 revenue was within expectations, but earnings were below. Revenue and adjusted PATMI were 47%/29% of our FY23e forecast. Post-expansion of clinics, the company is facing operating cost pressure such as staff cost, utilities, rent, finance and development expenditure of AI-guided clinical support software.
• Q&M has not opened any new clinics this year. The aim is to raise the utilisation of existing clinics with dentists and improve skill sets, especially for the loss-making clinics.
• We cut our FY23e PATMI by 34% to S$11.9mn. We lowered revenue by 4% and raised our operating expense assumptions. Our recommendation is downgraded from BUY to ACCUMULATE. The target price is lowered to S$0.34 (prev. S$0.47). We value the company at 25x PE FY23e earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.125, Not Rated), is valued at market price with a 20% discount. After building out a record 34 clinics or 30% 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.

The Positive

+ Growing the number of dentists. 1H23, the company has grown the number of dentists by 40 to 320 currently. This expansion in headcount will support revenue in 2H23. The company has stopped expanding into new clinics since September 2022. The aim is to grow the number of dentists or chairs in the existing chain.

The Negative

- Negative operating leverage. 1H23 operating expenses rose 3.7%, or S$2.1mn. Around 70% of the increase was higher employee expenses. Wages rose due to higher nurse wages and absence of a S$500k wage credit. Other increases were expansion-related fixed costs such as rental and depreciation. Q&M will suffer from negative operating leverage as fixed costs have elevated.

• Revenue met expectations but earnings were below. FY22 revenue and adjusted PATMI were 99%/90% of our forecast. The significant drop in COVID-19 related earnings and higher expenses in the development of AI-guided clinical support systems were the drag.
• Our adjusted PATMI excludes S$5.1mn of impairment of inventories (S$4.9mn) and plant and equipment (S$0.2mn) incurred in 4Q22.
• We are lowering our FY23e PATMI by 17% to S$17.9mn. After increasing the number of clinics by a record 34 (or 30%) over the past two years, the focus is to raise utilisation. Q&M continues to recruit dentists to fill its existing chain of clinics and upgrade the skills of dentists. Our BUY recommendation is maintained but target price lowered to S$0.47 (prev. S$0.52). We value the company at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.115, Not Rated), is valued at market price with a 20% discount.

The Positive

+ Number of clinics expanded. In FY22, Q&M expanded the number of clinics by 16 (or 12%). Most of the new clinics were in Singapore, with 10 new clinics. Profitability from core dental operations tripled to S$3.4mn. This was due to a change in the accrual of staff bonuses from a lumpy 4Q to proportionate provisioning per quarter.

The Negative

- Revenue per clinic declined. 4Q22 revenue per clinic declined by 12% YoY to S$382k. New clinics have not reached maturity, as nurse shortages and the re-opening of borders have dampened visits. Nevertheless, total revenue from core dental was flat YoY at S$46.2mn.

Outlook

The priority in FY23 is to raise the utilisation of the existing clinics. After the aggressive expansion over the past two years (34 clinics), the company will look to raise visits and revenue intensity per patient. Recruitment into the existing network of clinics will boost the availability of dentists. Improving the skill sets of the current dentists is another initiative to increase revenue intensity. Q & M is also pursuing an AI-guided dental software that creates an ethical standard cum procedures that supports dentists.

• 3Q22 earnings were below expectations. YTD22 revenue and PATMI were 77%/61% of our FY22e forecast. Employee expenses were higher than expected due to Acumen losses, software development expenses and higher opex from new clinics.
• Sharp 62% drop in earnings due to the absence of COVID-19 test revenue from Acumen. Acumen swung from PAT of S$4.4mn to an estimated S$0.1mn loss.
• We cut our FY22e PATMI by 30% to S$22mn. Expenses are running higher than expected. We expect employee expense to revenue to trend downwards as new clinics start to ramp up visitations. Our target price is lowered to S$0.52 (prev. S$0.60). We value core dental operations at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.169, Not Rated), is valued at market price with a 20% discount.

The Positive

+ Franchise is still expanding. There were three new clinics opened in 3Q22 (2Q22: 8). Another two clinics are planned in November. There has been a change in strategy in clinic openings. The priority is to fill existing capacity in current clinics before new locations are open. Other efforts are to build larger dental centres where profitability is higher from economies of scale.

The Negative

- Sluggish dental earnings and other expenses. Net profit from core dental operations declined 17% YoY to S$4.2mn. Performance of new clinics has been softer since border re-opening as visits have declined. Other expenses causing a drag in earnings have been the development cost of the AI guided dental software, recruitment cost for new dentists and start-up costs from new clinics. The record expansion of 24 clinics in Singapore and Malaysia over the past 12 months has been a burden on profitability in the near term.

• Earnings were below expectations. 1H22 revenue and PATMI were 52%/37% of our FY22e forecast. Additional cost from investments in AI project and change in recognition of bonus provision. Earnings from COVID-19 PCR tests swung from $3mn net profit a year ago to S$50k net loss.
• During the quarter, the number of clinics increased by 8 during to 149, a 19% YoY jump. Together with Malaysia, Q &M has 350 dentists.
• We lower our FY22e PATMI by 16% to S$22mn. We are incorporating additional cost for the AI project and even weaker earnings from Acumen. The target price is lowered to S$0.60 (prev. S$0.71). We value core dental operations at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.17, Not Rated), is valued at market price with a 20% discount. The company is expanding its dental clinics at the fastest pace since inception. We estimate CAGR of 18% over the next two years.

The Positive

+ Surge in number of clinics. There were 8 new clinics opened in 2Q22. It is a 19% YoY jump to 149. 1H22 has seen the opening of 13 new clinics, tracking our modelled 25 new clinics this year. Headcount especially nurses is a major bottleneck in the expansion of clinics. Despite the rise in the clinics, revenue rose by only 5%. Revenue per average clinic has declined to 10% YoY to S$293k. We believe it will take time for new clinics to ramp up. Group utilisation rate is still at 60-70%.

The Negative

- Rise in expenses. 2Q22 staff cost and depreciation jumped by 12% YoY to S$30mn despite the decline in revenue. We attribute the rise in expenses due to additional $0.5mn spent on the AI project, $1mn in bonus provision and S$0.7mn in equipment. AI expense was higher than expected. Bonus provision is allocated evenly across each quarter compared to a lumpy 4Q recognition.

Outlook

Investment into Artificial Intelligence (AI) project will continue into 2H22. Revenue per clinic should improve as clinics mature. Further, the company aims to raise the utilisation of current chain of clinics by adding new dentists in existing clinics rather than adding new clinics. AI software has received approval as a Class B medical device. It is being rolled out across Q & M’s dental clinics to independently generate dental plans for patients. Next phase is to deploy to other clinics in Singapore. Acumen’s focus is on sepsis, colon cancer and pharmacogenetics screening.

Maintain BUY with lower TP of S$0.60 (prev. S$0.71)

2022 is a transition year as the company invests in the AI project, accelerates the roll-out of more clinics and Acumen pivots away from the COVID-19 PCR test to other test kits.

• Earnings were within expectations. 1Q22 revenue and PATMI were 27%/25% of our FY22e forecast. New dental clinics drove dental earnings growth.
• Excluding disposal gains and COVID-19 PCR earnings, we estimate dental earnings growth of 27% to S$5.7mn in 1Q22.
• We maintain our FY22e PATMI and BUY recommendation. The target price is unchanged, and core dental operations are valued at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.175, Not Rated), is valued at market price with a 20% discount. Q & M Dental is expanding its franchise of dental clinics across Singapore and Malaysia. We estimate the number of clinics to grow at 18% CAGR over the next two years (or 27 p.a. vs management target of at least 30 p.a.).

The Positive

+ Fewer clinics this quarter but up 17% YoY. Only 2 clinics were opened in Singapore, unchanged from a year ago, but fewer than the 7 clinics opened last quarter.  Total number of clinics in Singapore rose 17% YoY to 99. Together with Malaysia, the total number of new clinics opened was 5. The company maintained the guidance of at least 30 and has identified 10 new locations.

The Negative

- COVID-19 PCR tests contribution becoming negligible. COVID-19 related earnings from Acumen, as measured by minority interest, has declined 76% QoQ from S$2.9mn to S$0.7mn. The need for PCR tests is now largely for outbound travellers. Acumen's focus is on sepsis and cancer marker PCR tests.

Outlook

We believe the reopening of borders will become a near-term headwind as the availability of dentists decline and patients will likely fall due to travel reasons.  New dental clinics will be the key earnings driver for the company. Other benefits of a larger dental chain are the de-risking revenue contribution from a larger pool of dentists and a more valuable referral ecosystem to the specialist dentist. In 1Q22, industry outpatient dental admissions was down 14%, QNM likely took some market share judging by the more stable revenue.

Maintain BUY with an unchanged TP of S$0.71

QNM is on its most aggressive expansion plan from an average of 5 clinics p.a. before 2019 to currently 25 to 30 p.a. Earnings in FY22e will be impacted by the collapse in COVID-19 PCR test revenue.

• Earnings were below our forecast. FY21 PATMI was 81% of our forecast. COVID-19 PCR test revenue declined dramatically and employee expenses were higher than expected.
• A record 7 new Singapore dental clinics were opened in 4Q21 (3Q21: +3). The number of Singapore clinics increased by 17% YoY in FY21 to 97.
• We cut our FY22e PATMI by 15% to S$26.3mn due to lower PCR revenue. Our BUY recommendation is maintained. The target price is lowered from S$0.82 to S$0.71. The core dental operations are valued at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.187, Not Rated), is valued at market price with a 20% discount. Our forecasted 15 new clinics in Singapore, plus a full-year contribution of 14 new clinics last year, will remain the growth drivers for the company. The number of clinics in Singapore is expected to jump 35% from FY19 to FY22e.
• Earnings were below our forecast. FY21 PATMI was 81% of our forecast. COVID-19 PCR test revenue declined dramatically and employee expenses were higher than expected.
• A record 7 new Singapore dental clinics were opened in 4Q21 (3Q21: +3). The number of Singapore clinics increased by 17% YoY in FY21 to 97.
• We cut our FY22e PATMI by 15% to S$26.3mn due to lower PCR revenue. Our BUY recommendation is maintained. The target price is lowered from S$0.82 to S$0.71. The core dental operations are valued at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.187, Not Rated), is valued at market price with a 20% discount. Our forecasted 15 new clinics in Singapore, plus a full-year contribution of 14 new clinics last year, will remain the growth drivers for the company. The number of clinics in Singapore is expected to jump 35% from FY19 to FY22e.

The Positive

+ Record quarterly expansion in clinics. The 7 new clinics in Singapore will be the highest quarterly expansion in clinic numbers. It equals the 7 in the entire FY19. Another two clinics to commence in 1Q22. The company has plans to expand by at least 30 dental clinics a year in Singapore and Malaysia for the next 10 years, starting from 2021.

The Negatives

- Dental earnings weak. Profitability from core dental operations was weak due to higher employee expenses from the provision of higher bonuses. Volume was also impacted by the wariness of patients for dental visitations due to the resurgence of COVID-19 pandemic cases.

- Collapse in COVID-19 PCR test earnings. Earnings contribution from Acumen collapsed from around S$4.4mn in 3Q21 to S$0.8mn in 4Q21.  ART has become the default option for most users. Under the new inbound travel requirements, PCR is no longer mandatory. Acumen will also pursue other PCR test products such as sepsis and colorectal detection. The near-term revenue driver will be ART testing.

Outlook

Revenue growth in FY22e will be driven by the 18 clinics (Singapore - 14 / Malaysia - 4) opened last year. A drag to FY22e earnings will be the decline in COVID-19 PCR test revenue. However, Acumen contribution will now be derived from the 46 clinics providing the ART testing services islandwide.

Q&M has plans to open at least 30 dental clinics a year from 2021 onwards in Singapore and Malaysia for the next 10 years. This implies a doubling of dental clinics in 5 years.

Maintain BUY with a lower TP of S$0.71 (prev. S$0.82)

We cut our FY22e PATMI by 15% to S$26.3mn due to lower PCR revenue. Our BUY recommendation is maintained. The target price is lowered from S$0.82 to S$0.71. We value the core dental operations at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.187, Not Rated), is valued at market price with a 20% discount. Acumen Diagnostics valuation of 51% stake is cut from S$30mn* to S$15mn.

*Implied valuation following the disposal of a 49% stake to associate Aoxin Q & M Dental.

• 3Q21 PATMI rose 69% YoY to S$9.5mn. Earnings modestly exceeded our expectations, at 78% of our adjusted FY21e forecast.
• All the growth was from COVID-19 PCR test. Dental PATMI is estimated to have declined around 18% YoY in 3Q21. Q & M is on track for a record 17 new clinics in Singapore this year.
• We are raising our FY21e PATMI by 8% due to higher PCR test earnings. Our BUY recommendation is maintained. The target price is maintained at S$0.82 (post bonus issue). The core dental operations are valued at 25x PE, in line with industry peers. The PCR test business is valued at recently transacted S$60mn. Listed associate, Aoxin Q & M Dental (S$0.27, Not Rated), is valued at market price with a 20% discount.

The Positives

+ COVID-19 PCR test drove earnings growth. Net profit from PCR tests expanded 47% QoQ to S$4.4mn. It accounted for all the earnings growth this quarter. The surge in COVID-19 cases has resulted in a spike in test requirements. We model around S$11mn net earnings from PCR tests in FY21e. We are expecting slower PCR testing revenue as the authorities transit to antigen rapid test (ART) as the default mode of testing.

+ Record expansion in clinics. 3Q21 Q & M added 3 new clinics in Singapore. There are plans for another 9 to 10 clinics in 4Q21. The 17 new clinics in 2021 would represent a record expansion for the company.  In 2019, Q & M added 7 new clinics but the pandemic stalled expansion plans in 2020.

+ Another quarterly dividend. Q & M announced another quarterly dividend of 1 cent during the quarter. This is the 3^rd consecutive quarterly dividend of 1 cent. No guidance or dividend policy was mentioned. The dividend yield for FY21e is around 6%.

The Negative

- Dental earnings declined. Earnings from the core dental business were surprisingly weak. Q & M dental revenue only rose 5% YoY. We believe the lockdown in Malaysia and surge in pandemic cases in Singapore may have stifled visitations for the company.

Outlook

The record new clinics in FY21 would be a major revenue growth driver in FY22e. Q &M has added much more resources in the recruitment, training and setting of new clinics. The objective is to annually expand 20 new clinics in Singapore per year.

Whilst we raise PCR earnings in FY21e, FY22e estimates are unchanged. Authorities are transitioning more towards ART as the main mode for testing PCR patients. PCR will still be an important testing tool for travel and confirmation of COVID-19 patients for hospitalization. Unclear if  Acumen will be developing or commercialising ART test kits.

Maintain BUY with unchanged TP of S$0.82 (post bonus issue)

We keep FY21e earnings unchanged. Dental valuation is pegged at 25x PE FY22e, in line with industry peers. Acumen Diagnostics PCR test is valued at S$60mn. This is the implied valuation following the disposal of a 49% stake to associate Aoxin. Our valuation for Acumen Diagnostics is now based on the implied S$60mn valuation. Aoxin’s valuation is marked to market with a 20% discount.

• 2Q21 PATMI within expectations, at 49% of our adjusted FY21e forecast. Revenue spiked 105% YoY to S$50.8mn. Normalised PATMI was up 10x. 1-for-5 bonus issue and 1 cent quarterly dividend announced.
• Earnings from Acumen Diagnostics’ COVID-19 PCR tests were an estimated S$3mn, up from S$0.6mn the previous quarter.
• Maintain BUY. Target price dips to S$0.98 from S$1.00 as we revamp our valuations. We now peg Acumen at S$60mn, at the proposed purchase price by Aoxin for a 49% stake. We roll over our 25x core P/E valuation to FY22e. Another S$0.04 has been added from the market value of listed associate, Aoxin Q & M Dental (S$0.225, Not Rated), at a 20% discount.

The Positives

+ Bounce in revenue. Increased demand for dental procedures due to closed borders, PCR test revenue and a higher number of dental clinics led to a 105% YoY surge in revenue. This was aided by a lower base last year due to circuit breaker. Core dental service rose 86% YoY to S$38mn. Medical equipment sales, including PCR tests, tripled to S$12.7mn. Revenue per dental clinic jumped 71% YoY to around S$308k in 2Q21. Pre-pandemic revenue per clinic in 2Q19 was around S$295k, a modest 5% lower. Industry data point to slower dental admissions in May and June 2021, likely due to the Phase 2HA lockdown.

+ COVID-19 PCR test earnings spiked. Earnings from PCR tests were around S$3mn this quarter, based on minority interest. This was a jump from S$0.6mn in the previous quarter. No details were disclosed. We model around S$7mn from PCR tests for FY21e.

The Negative

- New-clinic openings below run rate, for now. Q & M opened seven new clinics in 1H21: four in Singapore and three in Malaysia. This was below our forecast of 25. It plans to open 30 p.a. In Singapore, another six sites have been secured with 10 more to be completed. Singapore  appears on course for 20 new clinics but expansion in Malaysia remains fluid due to the pandemic. Revenue per clinic in Singapore is typically 4x higher than Malaysia.

Outlook

We expect dental admissions to remain healthy in 2H21. New clinics are expected to form the foundation of revenue growth in Singapore. Despite a rebound in revenue per clinic, industry patient volumes are still below pre-pandemic levels.

We forecast lower PCR testing income for FY22e. As the country moves towards higher vaccination rates and an endemic COVID-19, there is less clarity on the number of tests which will be administered in the next two years. That said, testing should remain an important tool as the country opens its borders. PCR testing will likely be required for vaccinated travellers, unlinked cases and routine tests.

Maintain BUY with lower TP of S$0.98, from S$1.00

We keep FY21e earnings unchanged but our valuation metrics has changed (Figure 1). Earlier, Acumen Diagnostics was valued together with group earnings at 25x FY21e PE. We now separately value Acumen. Associate Axoin is proposing to acquire the remaining 49% stake in Acumen for S$29.4mn via the issuance of 127.3mn shares at S$0.231 per share. The vendors are Acumen Holdings and Ong Siew Hwa (Figure 2). Our valuation for Acumen Diagnostics is now pegged to its implied S$60mn valuation.