• 1Q21 revenue and PATMI were within, at 24% of our FY21e forecasts.
• Core dental revenue surged 41% YoY to S$39.2mn. Dental visits climbed with households having more time and opportunities to undertake regular and elective procedures.
• Revenue from Covid-19 PCR lab tests yet to be material. We estimate only 10% of PATMI this quarter.
• We raise FY21e PATMI (excl. exceptionals) by 10% to S$30.3mn. Estimates for daily PCR tests have been doubled. But we shave off revenue in Malaysia in view of its extended lockdown.
• BUY recommendation maintained. We expect stellar earnings growth from higher patient visits and maiden earnings from PCR testing. Despite Covid-19 vaccinations, PCR testing in Singapore has increased. The threat of variants will likely make PCR tests a norm even when international borders re-open.
• Target price raised to S$1.00 from S$0.73. Our initial 20x FY21e P/E target or 50% discount to historical normalised average has been lifted to 25x. We think this can be justified by greater visibility of the sustainability of PCR revenue and core dental earnings as aggressive expansion of clinics is underway. Another S$0.03 is added from the market value of listed associate, Aoxin (S$0.18, Not Rated), at a 20% discount.

The Positive

+ Surge in revenue. 1Q21 revenue jumped 47% YoY to a record S$43mn. Core dental business was up 41% to S$39.2mn. The remaining revenue came from PCR tests and equipment that more than doubled to S$4.5mn. Revenue was supported by a 7.6% increase in dental clinics to 122. Admissions were  also higher. With borders closed and more time available, households could opt for more regular and elective dental procedures. Due to strict MOH requirements, revenue from PCR test kits is no longer separately disclosed.

+ Interim DPS. Net debt declined from S$75mn in FY19 to S$20mn in FY20. FCF was S$19mn. Another S$47mn was collected from the disposal of Aidite in 1H20. Q & M announced a special DPS of 2.5 cents to return S$19mn to shareholders from the proceeds of its sale of Aidite.

+ Higher Covid-19 PCR test earnings. PCR revenue was not disclosed. We used minority interest of S$0.6mn during the quarter as PATMI contributions from PCR. With PCR tests rising in Singapore, we double our daily test assumption for FY21e to 1,200. Q & M’s ability to ramp capacity is limited by a short supply of lab technicians in the country.

The Negative

– Short-term impact on revenue. While the country has entered a Phase 2 heightened alert lockdown from 16 May, dental clinics are allowed to stay open. However, we do expect cancellations. Patients will be wary of going for dental procedures despite all the safeguards in place. During the circuit breaker last April, dental clinics were not allowed to undertake any aerosol-generating procedures. This meant 90% of the procedures were prohibited except for extractions and temporary fillings.