CIBCHave a $13.50 target. GLTA
EQUITY RESEARCH
March 23, 2023 Flash Research
DENTALCORP HOLDINGS LTD.
Q4/22 First Look: Early Flu Cases Weigh On Growth But Q1/23 Outlook Points To A Rebound
Our Conclusion
dentalcorp reported an in-line Q4 with Y/Y revenue and adjusted EBITDA
growth of 21%. Although numbers were in line with consensus, estimates
had come down 2%-3% in recent weeks as management provided an update
on the impact of flu cases. Management’s outlook for Q1/23 was positive,
expecting total revenue growth of 22%-24% and same-practice sales growth
of 7%-8% as a result of price increases, the removal of fallow period
regulations and a rebound in patient volumes relative to an Omicron-
impacted previous year. As expected, spending on M&A was down relative to
previous quarters, although acquisition multiples contracted over 1.5x
sequentially as rising rates appear to have calmed the M&A marketplace.
Management also did not provide an update on the ongoing strategic review
process.
Key Points
Q4 Results: dentalcorp reported Q4 revenue of $331 million (consensus
$332 million/CIBC $330 million) and adjusted EBITDA of $61 million
(consensus and CIBCe $61 million). Adjusted EBITDA margins of 18.3%
were essentially in line with consensus and our estimate of 18.4%. Adjusted
EBITDA margins were down 10bps Y/Y.
Acquisition Update: dentalcorp acquired seven practices in Q4 that are
expected to generate $4.9 million in pro forma adjusted EBITDA. DNTL paid
$32 million in total consideration, implying an average multiple of 6.5x, down
from 8.1x in the prior quarter. Multiples declined for the second consecutive
quarter, and significantly so in Q4, as rising rates have made it more
challenging for smaller acquirers to finance M&A. The company ended Q3
with $796 million in liquidity, with $111 million in cash and $685 million in
debt capacity.
Q1/23 Outlook: dentalcorp provided guidance for Q1/23, expecting revenue
growth of 22%-24%, driven by same-practice sales growth between 7%-8%.
The strong same-practice sales growth number is drive by price increase,
rebounds in patient volumes and the removal of fallow period requirements.
DNTL expects to acquire $4 million-$5 million in annualized EBITDA in the
quarter at multiples that are 10%-15% below Q1/22 levels. That would imply
multiples in the range of 7.5x. Adjusted EBITDA margins are expected to
expand relative to the prior year given higher same-practice sales growth.
Additionally, in March 2023 DNTL hedged an additional $300 million of its
long-term debt and ~75% of the debt is now hedged with an all-in annual
interest rate cost of ~6.4%.
Same-practice Sales Declines Sequentially: Q4 same-practice revenue
growth was 2.0%, down sequentially from 2.4% in Q3/22. Practices benefited
from insourcing initiatives and the removal of fallow periods, offset by the
impact of an earlier onset flu season.