dentalcorp Holdings Ltd.
(DNTL-T) C$15.07
Optimistic 2022 Outlook Following COVID-19; M&A Pipeline Robust
Event
dentalcorp reported in-line Q4/21 adjusted EBITDA (IFRS-16) of $50.1mm (TD: $50.0mm, consensus: $49.3mm), reflecting in-line revenue and adjusted EBITDA margins of 18.4% (TD: 18.4%, consensus: 18.2%).
Impact: NEUTRAL
Preliminary Q4/21 results were released in January alongside dentalcorp's $115mm equity raise; so the quarter was a bit of a non-event. However, we were encouraged by management's outlook commentary, which indicated that Q1/22 results would be modestly higher than Q4/21, with results in January still affected by Omicron, but recovering sequentially month-over-month. Additionally, management highlighted that the acquisition pipeline is at record levels and that it is engaged on several accretive larger platform acquisitions, which are expected to close in Q1/Q2 of 2022.
Revenue increased 20.6% y/y to $272.5mm (TD/consensus: $271.2mm/ $270.9mm), reflecting 4.9% SSSG (TD: 1.5%) and a 15.4% growth in the practice count y/y to 458. There was less of an impact on SSSG from Omicron-related restrictions than anticipated and we believe the benefits of dentalcorp's orthodontics insourcing program may have bolstered sales. However, the contribution from M&A was slightly lower than our estimate. 13 new practices were acquired in Q4/21 (TD: 16), expected to generate ~$10.4mm in annual adjusted IFRS 16 EBITDA ($79.0mm consideration). Management noted that valuations of single-location practices have remained stable at 7.0x-8.0x EBITDA (pre-IFRS 16). However, it anticipates paying high single digits or low double digits to acquire larger multi-location practices. In FY2021, dentalcorp acquired 67 dental practices, budgeted to generate $43.3mm in PF adjusted EBITDA.
TD outlook: Barring another COVID-19 wave, we believe 2022 is primed for a solid recovery in organic growth rates and margins (after Q1/22), reflecting relaxed regulatory measures around patient throughput, optimized staffing, benefits of dentalcorp's expanded partnership with Align Technology to bolster dentalcorp's Invisalign offering through its Ortho Acceleration Program, and with the PC Health app launching, which we expect will drive incremental patient volumes.
TD Investment Conclusion
We are maintaining our BUY recommendation and $20.00 target price. 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.