CIBC 2EQUITY RESEARCH
March 23, 2023 Earnings Update
DENTALCORP HOLDINGS LTD.
Signs Of Normalization In 2023
Our Conclusion
With 2022 now in the rear-view, dentalcorp appears to be operating in a
more normalized environment that we expect to result in the relief of pent-up
demand and above-average same practice revenue growth. We continue to
like dentalcorp, particularly at current levels, as a recession-resilient business
that should benefit from pricing and volume growth throughout 2023. Long-
term supply contracts and price increases help to insulate margins, and with
75% of DNTL’s long-term debt now hedged, the risk associated with rising
rates is further mitigated. We view a possible DNTL takeout at a premium to
the current share price as a result of the ongoing review as potential upside.
We retain our Outperformer rating and reduce our target from $13.50 to
$13.00 as we roll our model forward to 2024 and move our target EBITDA
multiple to 13x, in line with a group of growth-by-acquisition peers.
Key Points
Same Practice Sales Set To Improve In 2023: Q4/22 same practice
revenue (SPR) growth of 2% was a result of competing factors, as
cancellations due to elevated flu cases in Q4 offset the positive impact of
fallow period regulations being fully removed. The impact of the flu appears
to have been short-lived, with management guiding to 7%-8% SPR growth in
Q1/23, well above recent levels. The strong Q1 bookings numbers are
partially a result of pent-up demand from prior cancellations, but also the
result of provincial fee guide increases that are expected to lift 2023 prices by
an average of 4%, and additional volume from insourcing procedures. With
pricing expected to contribute a 4% lift throughout the year and Q2/Q3
benefitting – relative to the prior year – from fallow period regulatory
changes, we expect SPR growth to fall at the higher end of management’s
3%-5% target range throughout 2023.
Acquisition Multiples On The Decline: DNTL acquired seven practices in
the quarter for total consideration of $32 million. The average acquisition
multiple of 6.5x marked a notable decline from 8.1x in Q3 and 8.9x in Q2. We
expect that acquisition multiples peaked in Q2/22 and should remain below
those levels in 2023. Our conversations with lenders in the dental space
suggest 2023 will be a challenging year for associate dentists looking to
acquire practices, given rising borrowing costs. As a group, associate
dentists are the largest acquirer in the space, and with some dentists now
being asked to put equity down for acquisitions after previously being able to
acquire with $0 down, the pool of dentists able to purchase clinics has
shrunk. Management also noted that 123/Altima appear to be focused on
integration over acquisitions, further supporting a softer valuation
environment in 2023. Despite a more attractive practice pricing backdrop, we
believe DNTL remains committed to slowing M&A activity in an effort to
accelerate de-leveraging. We are modelling $24 million in acquired EBITDA
in 2023, leading to de-leveraging of 0.5x turns from 4.5x to 4.0x by year end