Q3/22 results: Results ahead of estimates; acquisition pacing to be lower to focus on de- levering
TSX: DNTL | CAD 6.97 | Outperform | Price Target CAD 18.00
Sentiment: Positive
Our initial view: dentalcorp reported Q3/22 revenues of $312.1MM (-4.6% q/q; +24.7% y/y), ahead of RBCe ($310.2MM) and consensus ($310.5MM). GMs of 49.5% in the quarter increased q/q (48.6% in Q2) and were above RBCe (48.5%) and consensus (49.0%). Q3/22 adj. EBITDA of $59.3MM was ahead of RBCe ($55.9MM) and consensus ($56.6MM). The company anticipates to deliver double-digit revenue growth y/y in Q4/22. dentalcorp acquired 14 dental practices in Q3 for a total of $104.1MM (~8.1x IFRS EBITDA multiple vs. ~8.9x IFRS EBITDA multiple in Q2) and now has 538 practices across Canada. We expect these results to be positive for dentalcorp’s shares. Management noted that as a result of the accelerated acquisition pace over the last 18 months, the company is close to achieving its three-year growth plan. As such, dentalcorp will reduce the near-term pacing of acquisitions to accelerate de-levering and cash flow generation.
Revenues above RBCe and consensus expectations; GMs increased q/q. dentalcorp reported Q3/22 revenues of $312.1MM (-4.6% q/q; +28.7% y/y), ahead of RBCe ($310.2MM) and consensus ($310.5MM). Gross margins of 49.5% in the quarter improved q/q (48.6% in Q2) and were above RBCe (48.5%) and consensus (49.0%). dentalcorp reported same practice sales growth of +2.4% y/y in Q3 (vs. +3.1% y/y in Q2). The company noted the same practice revenue growth was aided by the company's orthodontics insourcing initiative with 268 dental practices in the ortho acceleration program (vs. 250 end of Q2/22 and 190 at the end of Q3/21).
Ahead of expectations on adj. EBITDA. dentalcorp reported Q3/22 adj. EBITDA of $59.3MM on an IFRS basis, ahead of RBCe ($55.9MM) and consensus ($56.6MM). The adj. EBITDA margin of 19.0% was up q/q (18.3%) and above consensus (18.2%) and RBCe (18.0%). Adj. FCF for Q3/22 was $28.8MM, down q/q ($41.7MM in Q2).
Acquired 14 practices ($12.9MM adj. EBITDA) in Q3 at an implied ~8.1x IFRS EBITDA multiple. dentalcorp acquired 14 dental practices in Q3/22 for total consideration of $104.1MM. The company expects the acquired practices to generate ~$12.9MM in annualized adj. EBITDA (implying an acquisition multiple of ~8.1x). This compares to $16.1MM of acquired EBITDA at an IFRS EBITDA multiple of ~8.9x in Q2/22. As of the end of Q3/22, dentalcorp owned 538 dental practices in Canada (vs. 526 practices end Q2/22). The company plans to acquire $5-7MM in acquired adj. EBITDA in Q4/22 and a similar modest acquisition pace in 2023 vs. 2022E. dentalcorp will reduce the near-term pacing of acquisitions to accelerate de-levering.
Sufficient liquidity for future acquisitions. dentalcorp ended the Sep-22 quarter with ~$133.0MM in cash and ~$700.4MM in debt capacity under its $1.75B senior debt facility (of which ~$1.05B was drawn at quarter-end). Post the quarter close, DNTL effected an interest rate swap agreement providing for a fixed rate of ~6.6% on $500MM of the $1.0B drawn under its $1.75B senior debt facilities resulting its total borrowing costs to ~6.5% based on interest rates and leverage as of the end of Q3/22.
Conference call. Today (09-Nov) at 8:30AM ET. Dial-in: 1 (888) 660-6396 or 1 (929) 203-0889; Conference ID: 9097710; Webcast link (here).