dentalcorp Holdings Ltd.
(DNTL-T) C$8.20
Q4 Preview: 2023 Poised for Improved Operating Environment Event
dentalcorp is scheduled to report its Q4/22 results pre-market March 23. Conference Call: 8:30 am E.T. (888-660-6396).
Impact: NEUTRAL
We forecast Q4/22 revenue growth of 20.9% y/y to $329.5mm and IFRS 16 EBITDA of $60.3mm (consensus: $61.3mm), reflecting +1.5% SSSG and the remainder from acquisitions completed in the past 12-months. We have slightly lowered our SSSG and margin assumption for Q4 reflecting recent commentary from global dental equipment manufacturer Henry Schein, which highlighted fewer dental visits during the quarter given increased incidence of seasonal flu and COVID-19 (this was seen across North America and internationally). We anticipate this may lead to increased patient cancellations, dentist/hygienist absenteeism, and modest cost pressures associated with scheduling inefficiencies.
2023 outlook: We are optimistic that the operating environment will significantly improve this year, with a lessened impact of COVID-19 and hopefully diminished cold/flu impacts following the elevated 2022 infections. Additionally, we anticipate a return to more normalized rhythm for patients as work/living arrangements are solidified. A return to regular patient flow should drive healthy SSSG and mitigate cost pressures from scheduling inefficiencies. Additionally, we expect to see robust pricing tailwinds across 2023 with most of the provincial fee guides outlining price increases above historic levels (>3% on a service mix weighted basis versus 0-2% historically). However, recessionary conditions may pose a modest incremental headwind for discretionary/cosmetic services (e.g. Invisalign, teeth whitening, etc.). In terms of dentalcorp's in-sourcing agenda, we would highlight that Invisalign maker Align Technologies saw an increasing volume of sales through DSO customers and growth in adult patients from the GP dentist channel during Q4/22; we view this positively as we continue to believe that the corporate dentistry model is uniquely positioned to enter strategic partnerships and invest in the training/equipment to increase SSSG through capturing greater "share of chair". On the M&A side, we expect to see a continued normalization of practice valuations given the rising interest rates and broader macro uncertainties.
TD Investment Conclusion
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.