Q1/23 ahead of estimates/guidance; strategic review concluded with adoption of the current strategy
TSX: DNTL | CAD 7.74 | Outperform | Price Target CAD 15.00
Sentiment: Neutral
Q1 positive but strategic review process outcome likely to be viewed as a disappointing outcome: While Q1 results were strong, DNTL also announced the conclusion of its strategic review process, whereby the company will continue to pursue its existing business strategy. The BoD noted that it believed none of the alternatives proposed by third parties reflected the fair value of the company. We see the outcome as disappointing relative to the initial management commentary, noting "expressions of interest" at the time. We expect there was a material disconnect between what third parties estimated to be fair value under current market conditions (CDN comps trading at ~12.5x 2023e which would imply an ~$11 value for the shares and within our $10-$13/ sh expectation). In contrast, several US comps have been trading at ~20x, which is likely closer to where the BoD believes DNTL value should trend over the longer term. In the near term, we expect some pressure on the shares and anticipate a trading range of $7-8/sh, implying ~9.5-10.3x EBITDA. We would be buyers at these levels, as these levels represent at least a ~20% discount to comps. We also note DNTL announced a NCIB for ~2%, or 3.5MM, of outstanding subordinate voting shares.
Separately, dentalcorp reported Q1/23 revenues of $358.3MM (+8% q/q; +28% y/y), ahead of RBCe ($343.7MM) and consensus ($345.4MM) and above the guided range ($341.8-347.4MM). GMs of 50.0% in the quarter increased q/q (48.2% in Q4) and were above RBCe and consensus (~49.5%). Q1/23 adj. EBITDA of $65.6MM was ~4% ahead of estimates (RBCe and consensus ~ $63MM). dentalcorp acquired 6 dental practices in Q1 for a total consideration of $35MM (~6.5x IFRS EBITDA multiple similar to the acquisition multiple in Q4) and now has 536 practices across Canada. DNTL announced Q2/23 guidance - which was ~2-3% below on revenues and ~3.5% below on adj. EBITDA at the mid-point of the guidance range. The guidance miss is likely due to the divestiture of 13 standalone orthodontics practices as part of dentalcorp’s program to rationalize certain non-core standalone specialty practices. Management anticipates that the sale of these assets will have a positive impact on overall adj. EBITDA margins, allowing it to re-allocate resources to higher growth areas of its business. On the earnings call, we expect updates on volume recovery and insourcing initiatives to drive organic growth.
Q1 Revenues above RBCe, consensus and guidance; GMs increased q/q. dentalcorp reported Q1/23 revenues of $358.3MM (+8% q/q; +28% y/y), ahead of RBCe ($343.7MM) and consensus ($345.4MM) and the guided range ($341.8-347.7MM). Gross margins of 50.0% in the quarter increased q/q (48.2% in Q4) and were above RBCe and consensus (~49.5%). dentalcorp reported same practice sales growth of +8.5% y/y in Q1/23 aided by growth in patient visits over the same period last year (depressed due to Omicron), and the contribution of fee guide increases.
Adj. EBITDA ahead of RBCe and consensus. dentalcorp reported Q1/23 adj. EBITDA of $65.6MM on an IFRS basis, ahead of RBCe ($63.2MM) and consensus ($63.3MM). The adj. EBITDA margin of 18.3% was flat q/q (18.3% in Q4) and broadly in line with consensus (18.3%) and RBCe (18.4%). Adj. FCF for Q1/23 was $32.9MM and net leverage was down to 4.4x.
Acquired 6 practices ($5.4MM adj. EBITDA) in Q1 at an implied ~6.5x IFRS EBITDA multiple (7.1x GAAP). dentalcorp acquired 6 dental practices in Q1/23 for total consideration of $35MM. The company expects the acquired practices to generate ~$5.4MM in annualized adj. EBITDA (implying an acquisition multiple of ~6.5x or 7.1 under US GAAP). As of the end of Q1/23, dentalcorp owned 536 dental practices in Canada (vs. 542 practices end Q4/22).
Outlook for Q2/23 - below RBCe and consensus likely on ortho practice sales. The company anticipates delivering 9.5%-10.5% y/ y revenue growth in Q2/23 and estimates same practice revenue growth of 5-6%. The Q2/23 revenue guide of $358-$361MM vs. consensus ($369.2MM) and RBCe ($367.1MM). The company expects adj. EBITDA margins to be materially consistent with Q2/22 (18.3%), implying adj. EBITDA of $65.5-66.0MM vs. RBCe ($68.2MM) and consensus ($68.3MM). The company expects to acquire PF GAAP Adj. EBITDA between $4-5MM in Q2/23. The guidance miss is likely due to the divestiture of 13 standalone orthodontics practices as part of dentalcorp’s program to rationalize certain non-core standalone specialty practices. Management anticipates that the sale of these assets will have a positive impact on overall adj. EBITDA margins, allowing it to re-allocate resources to higher growth areas of its business.
Sufficient liquidity for future acquisitions. dentalcorp ended the Mar-23 quarter with ~$111MM in cash and ~$674MM in debt capacity under its $1.75B senior debt facility (of which ~$1.1B was drawn at quarter-end). During the quarter close, DNTL hedged an additional $300MM of its bank debt. Approximately 75% of the bank debt exposure (~$800MM) carries a fixed CDOR rate plus margin for an all-in cost of ~6.4%.
Conference call. Today (12-May) at 8:30AM ET. Dial-in: 1 (888) 660-6396 or 1 (929) 203-0889; Conference ID: 9097710; Webcast link (here).