Keystone FinancialFrom March 7 - Ryan Irvine and his crew; they review thousands of stocks but only select about 10 per year to purchase. GLTA
Dentalcorp Holdings Ltd. (DNTL:TSX)
Price: $9.71
Market Cap: $1.802 Billion
Description:
Dentalcorp Holdings acquires and partners with dental practices to provide health care services in Canada. As at September 30, 2022, Dentalcorp is the largest provider of dental services in Canada as it owns and operates a network of over 538 dental practices with approximately 8,450 team members, including over 1,650 dentists, over 2,000 hygienists, and over 4,800 auxiliary dental health professionals.
Slide 3
Looking at the company’s growth strategy
The company aggressively grows through acquiring independent dental practices with a selection criteria of $2.0-$2.3M in revenue and $450-$500K in EBITDA. With a current pipeline of over 720 identified target practices, of which approximately 190 are in more advanced stages of negotiation. And management claim’s that following an acquisition of a practice they can reduce costs and increase the practice’s EBITDA margin by 10-15% following the first year.
Plus, they target 3%+ medium term practice revenue growth by increasing frequency of patient visits, and by increasing service offerings with clear aligners through their partnership with Invisalign®, and ortho treatments & implants.
Slide 4
Operational Updates:
On November 21, 2022, the company announced a Strategic Review process to “unlock shareholder value”. Which the board has established to potentially sell the business, following some unsolicited expressions of interest from other parties. They noted that there can be no assurance that the process will lead to the approval or completion of any transaction, and it does not intend to provide any updates with respect to the review until the Board approves a specific transaction or otherwise concludes review of its alternatives.
And as a sagway into the financials, I just wanted to note the company’s most recent equity raise of $115M in January 2022, as the company aggressively acquires practices and either needs to fund this through debt, share issuances, but most importantly – through internally generated CASHH FLOWW.
And you can see in share count chart from Y-Charts, the company’s share count has increased increase from to 185 million shares outstanding.
Slide 5
Recent Financials (Q3 2022)
| | Q3 22 | Q2 22 | Q1 22 | Q4 21 | Q3 21 | Q2 21 | Q1 21 | Q4 20 |
| Revenue | $312.1M | $327.0M | $280.2M | $272.5M | $250.2M | $261.1M | $247.0M | $225.9M |
| EPS | $(0.08) | $0.01 | $(0.06) | $(0.26) | $(0.11) | $(0.87) | $(0.10) | $(1.70) |
| Adj. EBITDA | $59.3M | $59.8M | $50.1M | $50.1M | $46.2M | $48.9M | $46.7M | $32.7M |
| CFO | $36.6M | $50.9M | $44.0M | $23.6M | $2.8M | $16.7M | $14.1M | $(10.7)M |
- Revenue for Q3 2022 was $312.1M an increase of 25% from $250.2M in Q3 2021.
- Adjusted EBITDA was $59.3M an increase of 28% from $46.2M in Q3 2021.
- Net income was a loss of $(14.7)M or $(0.08) per share compared to a loss of $(18.4)M or $(0.11) per share compared to nil for Q3 2021.
- As at Q3 2022 Dentalcorp held $133.0 million in cash and Debt & leases of $1.35 billion, providing a net debt position of $1.22 billion and a trailing net debt to EBITDA multiple of 5.5 times. And if we look at the Interest Coverage Ratio (EBIT/Int. Expense), in the last quarter the company’s was 0.12 times… so we can see the company’s earnings before interest and tax is not sufficient to pay the company’s interest charges. (generally, this ratio should be well above 1)
- Trades with an EV-to-EBITDA multiple of 13.8x and an EV-to-CFO multiple of 20x.
Management anticipates modest quarterly acquisition pacing in 2023 and is “well positioned to generate double digit revenue and adj. EBITDA growth, while generating strong free cash flow to accelerate its pace of de-levering the balance sheet without the need to raise additional debt or equity capital”.
CONCLUSION
To conclude, though a slight hiccup to growth during the pandemic dentalcorp has shown impressive double-digit growth in revenue and EBITDA, albeit through taking on a significant amount of debt and issuing shares. The business does generate positive cash flow, which is good, but given the highly levered balance sheet, rising interest rates, lack of bottom line profitability, and the need for additional funds to continue to grow the, the risk of an investment in the business is heightened. And the future growth rate comes under question as its access to funds are being strained (unless it decides to do an equity raise). It is interesting that the business is conducting a strategic review – which I am not sure if it will amount to anything – but what I would like to see from the business is to lower the leverage on its balance sheet, and try to get into meaningful bottom line profitability.