dentalcorp Holdings Ltd.
(DNTL-T) C$16.23
Equity Raise Positions DNTL for Accelerated Acquisition Cadence Event
We are resuming coverage following the closing of DNTL's $115mm bought deal equity financing. DNTL issued 7,055,250 subordinate voting shares (~4% increase in the share count) at a price of $16.30/share.
Impact: NEUTRAL
DNTL intends to use the proceeds to bolster its balance sheet in order to fund an accelerated cadence of acquisitions in 2022, with management noting a very robust pipeline of both single location and larger multi-location practices (we believe DNTL's IPO, combined with COVID-19 operating fatigue, have been catalysts for dentists to consider selling). Pro forma the equity raise and recent acquisitions, we estimate that leverage declines to ~3.6x, from ~4.0x as at Q3/21, with over $600mm of total available liquidity.
At the time of the IPO, we had anticipated that DNTL could transition into a largely self-funding growth model, assuming that it acquired $35mm-$40mm of IFRS 16 EBITDA annually, while maintaining leverage at or below 4.0x. However, given the robust acquisition pipeline, the company has accelerated its growth plans, with more than $43mm of PF adjusted EBITDA acquired in 2021 (62 acquisitions for a total of 67 additional locations), above its three-year average of ~$35mm, and it appears that 2022 could be even stronger. We forecast $47mm of acquired EBITDA and 70 new practice locations in 2022 (up from $40mm previously).
We understand that valuations have remained largely stable at 7x-8x EBITDA (pre IFRS 16) for single-location practices, but anticipate that if DNTL acquires some of the larger multi-location practices, valuations could be in the 8.0x-10.0x range. Although the platform acquisitions are more expensive, we believe greater synergies and growth potential exist, allowing DNTL to still underwrite its targeted 15% ROIC.
We have updated our model to reflect DNTL's preliminary Q4/21 results and the equity financing, and increased our M&A assumptions. However, we have tempered our H1/22 estimates to reflect potential Omicron-related dentist/hygienist absenteeism and patient booking deferrals and modestly higher costs.
TD Investment Conclusion
We are attracted to dentalcorp's large and highly fragmented Canadian market opportunity, and strong FCF profile, as a capital-light services business. Additionally, we view dentistry as a recurring, essential service, with expenditures resilient to changing economic conditions.