• Q&M Dental's COVID-19 testing revenue below expectations at ~S$10m (our estimate), with higher test margins offsetting lower contribution. Expect ramp up in 2H21F.
• Outlet expansion accelerated in Singapore (10 outlets opened/secured year-to-date).
• Bonus share issuance proposed of 1 bonus share for every 5 existing shares.
• Reiterate ADD. We keep our target price at S$0.97 for Q&M Dental, still based on 20x FY22F P/E.
• Key re-rating catalysts include higher-than-expected number of tests conducted.

Lower Revenue Offset by Higher Testing Margins

• Q&M Dental Group (SGX:QC7)’s recorded 2Q21 net profit of S$8.4m (+23% y-o-y), in line with our estimate of S$8.2m. This brings 1H21 net profit to S$18m (+54% h-o-h, +119% y-o-y), in line at 50% of both our and consensus FY21F forecast.
• 2Q21 revenue of S$51m (+16% h-o-h, +104% y-o-y) missed our estimates due to lower-than-expected contribution from testing services. However, EBIT margins from the medical laboratory & dental equipment segment came in higher than expected at 51% in 2Q21 (vs. 35% in 2Q20, which had no contribution from testing).
• Q&M Dental announced a proposed bonus share issuance of 1 bonus share for every 5 existing ordinary shares.
• An interim dividend of S$0.01 was declared by Q&M Dental in 2Q21.

Testing Beginning to Shine

• We estimate that Q&M Dental's 2Q21 testing revenue increased to new variants of the virus will further support testing demand, in our view. We keep our daily test assumptions at 1,500, while factoring in higher margins and lower pricing.

Expansion Plans Accelerated in Singapore, Slowed in Malaysia

• Q&M Dental accelerated its outlet expansion plans in Singapore, with the movement control order (MCO) imposed.
• We increase our FY21F new outlet forecasts in Singapore to 15 (vs. management guidance of 20) in view of Q&M Dental’s promising pace of expansion.

Reiterate ADD on Q&M Dental With Unchanged Target Price

• This report marks a change in covering analyst. We believe 2H21F should be supported by continued ramp-up in testing operations. Our target price for Q&M Dental remains at S$0.97, based on 20x FY22F P/E (~25% discount to peers for smaller market cap).

• Re-rating catalysts include higher-than-expected number of tests performed.
• Downside risks include increasing competitive pressure and rising employee costs.

Source: CGS-CIMB Research - 13 Aug 2021