dentalcorp Holdings Ltd T.DNTL

TD

[retiredcf]

Here's another one for you condor ($17.00). GLTA

dentalcorp Holdings Ltd.

(DNTL-T) C$6.97

First Look: 5% EBITDA Beat; Dialing Back Growth to Deleverage Event

dentalcorp reported Q3/22 adj. EBITDA (IFRS 16) of $59.3mm, ~5% above TD/Consensus of $56.4mm/$56.6mm reflecting stronger-than-expected EBITDA margins of 19.0% (TD: 18.0%) and roughly in-line revenues.

Impact: POSITIVE

Headline Q3 results were solid, with DNTL continuing to deliver robust double-digit growth. However, in our view the biggest takeaway in the release was management's commentary that it intends to slow the pace of acquisitions in Q4 and across 2023 (targeting $5-7mm of acquired EBITDA per quarter) and to focus on de-leveraging. This implies annual acquired EBITDA of $20-30mm (TD 2023: ~$42mm), versus its expected 2022 level of ~$60mm. In our view, this is the right approach as investors are laser focused on DNTL's elevated balance sheet leverage of ~4.3x (average cost of debt: 6.5%, ~50% fixed). We anticipate that DNTL's multiple will expand as it simultaneously delivers growth from FCF generation and deleveraging.

• Revenue increased 24.7% y/y to $312.1mm (TD/cons: $314.3mm/$310.7mm), reflecting 2.2% SSSG (TD: 4.0%) and a 20.9% growth in the practice count y/y to 538. SSSG were impacted by ~20bps related to Hurricane Fiona (adjusted SSSG: 2.4%). Practices in the Ortho Acceleration Program increased ~41% y/y to 268. Adjusted EBITDA margins of 19.0% were 105bps above TD's 18.0% estimate.

• Practice acquisitions: During Q3/22, DNTL acquired 14 locations (primarily single locations) with ~$12.9mm of PF adj EBITDA for total consideration of $104.1mm. YTD DNTL has acquired 84 locations expected to generate ~$54mm in annual adj. EBITDA (40 acquisitions). dentalcorp's acquisition pipeline remains robust with ~720+ total opportunities in its pipeline and 190+ in the more advanced stages of negotiation.

• FCF (pre-working capital) of $18.8mm, below TD's $29.7mm estimate.

• Balance sheet: Net debt (excl. leases): $911.6mm (cash: $133.0mm, debt: $1,044.6mm), up from $853.9mm as at Q2/22 reflecting positive FCF offset by acquisitions. Leverage: ~4.3x pro-forma. Available liquidity: $833.4mm.

• Pro-forma LTM revenue/EBITDA including acquisitions is $1,318.8mm/ $254.2mm ($213mm pre IFRS16), respectively. PF EBITDA margin: 19.3%.

• Outlook: Management anticipates generating double-digit revenue and adjusted EBITDA growth near-term, without the need to raise additional debt or equity capital. Management also anticipates operating leverage with significant corporate investments made in 2022 and now largely complete.