• 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.