Desjardins Initiate Coverage Calling it a “quality compounder,” Desjardins Securities’ David Newman initiated coverage of Dentalcorp Holdings Ltd. with a “buy” rating.
The analyst pointed to a quartet of factors in justifying his bullish view of the Toronto-based company, which operates a rapidly expanding national network of independent dental practices: “(1) proven M&A playbook in a fragmented market; (2) organic growth; (3) proprietary technology; and (4) compelling financial profile (resilient top-line growth, healthy margins and strong cash flows).”
“The leader in Canada’s $18-billion dental industry, DNTL has enjoyed double-digit growth in number of practices, pro forma revenue and EBITDA every year since its inception, leaning on its M&A playbook,” said Mr. Newman in a research note released late Wednesday. “Moreover, dentistry offers downside protection with its recurring, non-discretionary, cash-pay model, insulated from economic cycles and disintermediation by technology.”
“Despite its success, DNTL holds only a 3-per-cent share of the highly fragmented Canadian dental market (comprised of approximately 15,000 practices, 95 per cent of them independent). It targets the acquisition of $4050-million in post-IFRS practice-level EBITDA each year (at least 80 practices), which it achieved in 2021. It typically pays 7.58.5 times pre-IFRS EBITDA (80-per-cent cash, 20-per-cent equity) for practices with more than $2-million in revenue, 20-per-cent margin and 2+ dentists. DNTL has been able to drive top-line growth of the acquired practices through its insourcing agenda and technology stack, while expanding practice-level EBITDA margins by 510 per cent through its fully scaled infrastructure and labour and purchasing efficiencies. DNTL has become the acquirer of choice for dentists, evidenced by its greater than 90-per-cent retention rate and 96-per-cent contract renewal rate. DNTL has $520-million in dry powder to accelerate its M&A program.”
Mr. Newman projects organic growth should reach 3.54.5 per cent annual per year based on “pricing, volume (centralized marketing and technology (hellodent, dc engage) driving patient acquisition, retention and frequency of visits) and mix (higher-margin hygiene, as well as orthodontics and implants (C$100m revenue opportunity each).”
He set a target of $22, exceeding the average on the Street of $20.36.
“We see significant growth ahead as DNTL executes its repeatable acquisition playbook, driving both top-line growth and bottom-line improvements for acquired practices, while pushing its organic growth agenda, including orthodontics insourcing, implants, network synergies through economies of scale and driving new patients and frequency of visits with its technology toolbox,” said Mr. Newman. “We view DNTL as a quality compounder in the Canadian consumer healthcare sector, in the realm of other high-growth healthcare companies as well as high-growth consolidators in other industries that are characterized by a fragmented market, resilient demand with underlying secular tailwinds and an emphasis on growth through scale.”