November 9, 2022
dentalcorp Holdings Ltd.
Q3/22: Results ahead of estimates; Attractive at an ~8.7x multiple, in our view
Our view: Q3/22 revenues and adj. EBITDA were stronger than RBCe and consensus estimates. Same practice sales growth was +2.4% y/y in Q3, impacted by Hurricane Fiona (vs. +3.1% y/y in Q2). dentalcorp acquired 14 practices with adj. EBITDA (IFRS) of $12.9MM in Q3 at an ~8.1x IFRS EBITDA multiple (8.9x in Q2). Management expects the EBITDA acquisition pace to moderate in Q4 and 2023 to a level of $5-7MM/Q, which should contribute to lower leverage ratios. At ~8.7x EV/EBITDA, we reiterate our Outperform rating with a revised $15 PT (from $18), reflecting the rising rate environments and lower comps.
Key points:
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%).
Ahead of expectations on adj. EBITDA. dentalcorp reported Q3/22 adj. EBITDA of $59.3MM on an IFRS basis (including $2.1MM realized FX gain on company's USD cash holdings), 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 implied ~8.1x IFRS EBITDA multiple. dentalcorp acquired 14 dental practices in Q3/22 for total consideration of $104.1MM (mgmt expects acquired practices to generate ~$12.9MM in annualized adj. EBITDA implying an acquisition multiple of ~8.1x). 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 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.