dentalcorp Holdings Ltd.
(DNTL-T) C$10.83
Solid Q2; Management Highlights Ability to Grow and Deleverage Event
We are updating our estimates following dentalcorp's Q2/22 results. dentalcorp reported Q2/22 adjusted EBITDA (IFRS 16) of $59.8mm, effectively in line with our estimate of $60.9mm, but 3.1% above consensus of $58.0mm.
Impact: NEUTRAL
We view the Q2/22 results as largely neutral, with the quarter broadly in line with our estimates, as dentistry remains a resilient essential service. Management noted that the quarter continued to be affected by lingering COVID19- related patient cancellations and dentist/hygienist absenteeism (consistent with commentary across many industries, with COVID-19 impacts diminished, but not gone). Looking forward, management provided an optimistic outlook for double- digit growth in Q3/22, including strong SSSG. We believe that possible upside exists to SSSG in the near term, given Ontario has now significantly decreased COVID-19-related regulatory restrictions around patient throughput. We believe that this could be the first of a broader reduction of restrictions across Canada. Layering on the orthodontics and implant insourcing programs provides a constructive organic growth backdrop, in our view.
Revenue increased 25.2% y/y to $327.0mm (TD/consensus: $325.4mm/ $315.5mm), reflecting 3.1% SSSG (TD: 4.0%) and a 22.0% growth in the practice count y/y to 526. Practices in the Ortho Acceleration Program increased ~40% y/y to 250. Revenue from recent acquisitions exceeded expectations; management noted that its M&A pipeline remains robust, but that it expects fewer "mid-market" platforms to be acquired across H2/22 versus H1/22, which should see the acquisition multiples decline slightly from recent levels.
Q2/22 FCF generation of $31.4mm was solid (TD: $33.3mm), and we were encouraged by management's commentary that its projected cadence of M&A for ~$35mm of acquired EBITDA annually will allow it to deleverage 0.25-0.3 turns annually, highlighting the attractiveness of the self-funding model. Ultimately, management expects to operate with leverage in the high-2s to mid-3s over the medium term following the current period of elevated M&A.
TD Investment Conclusion
We are maintaining our BUY recommendation, but lowering our target price to $17.00, reflecting our revised estimates. 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.