CIBCEQUITY RESEARCH
May 5, 2023 Flash Research
DENTALCORP HOLDINGS LTD.
Q1/23 Preview: Waiting For A Strategic Review Resolution
dentalcorp will report its first quarter results before the open on May 12, with
expectations that patient volumes will benefit from multiple tailwinds. For the
first time, management provided guidance that included 7%–8% same
practice revenue growth, 22%–24% total growth and $4MM–$5MM of
acquired annualized EBITDA. A strong same practice revenue growth print
would help build confidence in the fundamentals of the business, but we do
not expect shares to move materially in response to results until the ongoing
strategic review is resolved. While we had previously seen a take-private as
the most likely outcome of the review, the length of time since the review was
announced and the sharp rise in borrowing costs over that period have
lowered the likelihood of a take-private transaction, in our view.
Key Points
Looking For Elevated Same-practice Revenue Growth: DNTL has faced
consistent COVID-related headwinds to same-practice revenue (SPR)
growth since its 2021 IPO due to government restrictions and elevated
patient/provider absences. After an earlier-than-usual flu season in Q4 2022,
DNTL expects the combination of pent-up demand, strong inflation-linked fee
guide increases and the removal of fallow period restrictions to lead to
elevated same-practice sales growth, and guided to 7%–8% SPR. We see
the elevated SPR outlook as achievable given the numerous tailwinds.
Strategic Review Ongoing: The company remains in the midst of a
strategic review that was announced on November 21 in response to
unsolicited expressions of interest. Shares reacted positively to the news and
have generally traded between $8.50–$9.50/share since the announcement.
While we are not expecting an update on the review given management’s
reluctance to comment until the process is complete, the longer the review is
ongoing, the harder it becomes for us to envision a take-private transaction.
However, if the review has reached a conclusion, we may see an
announcement with the quarter. Rising borrowing costs over the course of
the review have made the economics of a debt-financed acquisition of DNTL
much more challenging today than it would have been in late 2022. Given the
range-bound nature of the stock since the review was announced, we do see
downside risk to shares if the review ends without a take-private offer.
Acquisition Performance: We are expecting acquisition multiples to
continue to decline in Q1, as elevated borrowing costs make it challenging
for associate dentists to make competitive offers. Despite the more attractive
valuation environment, DNTL’s focus on deleveraging will see it spend much
less on acquisitions in 2023 than it did in 2022. We forecast $5 million in
acquired annualized EBITDA at a 7.5x multiple, down from the 8.5x average
in 2022.