CIBC ReportEQUITY RESEARCH
March 25, 2022 Earnings Update
DENTALCORP HOLDINGS LTD.
Controlling The Controllable
Our Conclusion
dentalcorp reported a fourth quarter that showed continued progress on key
initiatives, but also underscored the short-term pressures that COVID
continues to have on the business. Headline numbers were in line with the
January pre-release and the acquisition program remains on track with larger
acquisitions in the quarter, putting some upward pressure on multiples. While
COVID pressures in the first six weeks of Q1 will impact same-practice sales
growth, the M&A program should continue to drive 20%+ revenue growth.
We retain our Outperformer rating and $20 price target.
Key Points
Margin Profile: Adjusted EBITDA margins of 18.4% were in line with
expectations but did include $8.7 million in COVID adjustments. Excluding
the COVID adjustments, margins would have been 320 bps worse at 15.2%.
Gross margins in the quarter were 45.7%, down 370 bps sequentially. Gross
margin pressure was a result of COVID mitigation measures taken in 2020
which impacted cost of sales in the quarter. While the adjustment does raise
some questions around the trajectory of gross margins and the transitory
nature of the adjustment to EBITDA, management expects the one-time
impact to be isolated to the fourth quarter.
Multiples Up On Larger Deal Sizes: dentalcorp completed 13 practice
acquisitions in the quarter, adding $10.4 million in annual adjusted EBITDA.
Total consideration of $79 million implies an average acquisition multiple of
7.6x, up from 6.7x in Q3 and 6.5x in Q2. The uptick was a result of larger
practice acquisitions in the quarter, with average EBITDA/practice of $800k
vs. a typical single practice location at closer to $600k. We continue to
expect dentalcorp to be active on larger acquisitions in H1/22, and believe
those deals are likely to be completed at high-single-digit multiples.
Ortho Acceleration Update: Momentum remains solid on the orthodontics
rollout, with 202 clinics currently enabled for ortho work, up 54% from the
prior year. That pace of 71 practices/year is expected to continue into 2022,
with an opportunity for practices that are fully operational to add 5%-6% to
annual revenues. dentalcorp also announced an expanded partnership with
Align, giving practices better access to product training and improving the
margin potential from the deal. We expect the arrangement to also have a
positive impact on the pace of the rollout for new clinics.
Federal Dental Care Announcement: Management weighted in on a recent
joint proposal between the Federal Liberals and NDP to expand access to
dental care. Specifics on the plan remain limited, and management ultimately
expects that the program will expand on the provincial subsidy programs
already in place. We see the announcement as an incremental benefit as it
could expand the total Canadian market, but also raises questions around
reimbursement levels and their impact on insurance provider reimbursement.