1 Main Capital Yaron Naymark is the
founder and CIO of 1
Main Capital, a
concentrated, long-
biased, value-oriented
fund that he founded
in 2018. The firm
invests in high-
quality, reasonably-
valued businesses
with long
reinvestment runways
and special situations
experiencing a
temporary dislocation
and undergoing an
element of change
that will lead to near-
term revaluationG&D:
Now, let’s get into a
discussion of individual
positions within the
portfolio.
To start off,
could you talk about
dentalcorp?
YN:
Sure. dentalcorp is the
largest dental service
organization (DSO) in
Canada, with over 500
practices. DSOs roll-up
dental practices, which
are great businesses.
They exhibit consistent
growth, driven by a
captive customer base
that gets teeth cleaned,
and cavities filled
regardless of the
economic environment.
Basically, small local
utilities.
Big picture, the dental
industry has been
consolidating and
continues to do so. In
the US, around one third
of dental practices are
owned by DSOs, while in
Canada that figure is
only a single digit
percent of practices. It's
not inconceivable to
think of a world where
half of all dental
practices are owned by
DSOs, as older dentists
retire and new, young
dentists lack the capital
needed to buy practices.
This industry
consolidation has been
taking place at attractive
multiples – dentalcorp is
currently buying
practices at 7x EBITDA.
The combination of
underlying business
growth and ability to
deploy capital at
attractive multiples
drives DSOs to deliver
consistent and attractive
free cash flow per share
growth. For this reason,
DSO platforms typically
trade for 15x EBITDA.
Accordingly, when
dentalcorp came public
in 2021, it did so at a full
multiple.
However, shortly after
its IPO, the stock sold off
meaningfully for several
reasons. First, the
company deployed
significant amounts of
capital into acquisitions
at what were historically
high multiples. Following
the pandemic, individual
dentists bid up practice
multiples due to their
ability to borrow at near-
zero interest rates.
Despite the inflated
valuations, dentalcorp
deployed its IPO
proceeds into M&A
because it had raised
capital to grow.
However, due to the
high multiples, the
company acquired less
EBITDA than it should
have relative to the
amount of capital
deployed.
On top of that, the
business suffered from
inflation. Dental
practices typically adjust
pricing once per year,
but their costs can
change at any time.
Following the pandemic,
Page 48
reasons, the company
should grow free cash
flow per share at
attractive rates in 2024
and beyond.
As FCF per share grows,
the stock should follow
even if the multiple stays
at currently depressed
levels. Eventually, the
shares will get to a level
where the company’s
sponsor is comfortable
further selling down its
stake. As liquidity
improves, larger funds
will be able to look at
the company once again.
In my view, this will
drive the multiple back
to a more typical level
for DSOs. However, even
without multiple
expansion, growth in
free cash flow per share
should be enough to
deliver a satisfactory
return from today’s
prices.
Today, dentalcorp trades
at half that multiple that
a scaled DSO platform
typically demands in
private transactions. It is
bigger and more
diversified than most.
What’s more, if run for
cash flow, EBITDA would
be much higher, as the
significant expenses
associated with the M&A
team would no longer be
necessary. There's a
wide margin of safety in
terms of valuation. The
business quality is high.
I think there's a lot of
growth ahead, both
organic and via M&A. I
like buying high quality
businesses below market
multiples and this checks
all the boxes.
G&D:
How do you get
comfortable with the
long-term earnings
trajectory of dentalcorp?
YN:
Dentistry is something
people need and don’t
stop spending on even
when times are tough.
There are some elective
procedures that people
defer, but for the most
part, cleanings, and
cavities must be
addressed. Technological
obsolescence risk is very
low. AI is not going to
kill the need to keep
your teeth in good
condition. It’s highly
diversified in terms of
customers. It has
millions of customers,
and thousands of doctors
and hygienists. When
thinking about the
quality of the business, it
checks many of the
boxes. It can grow
pricing with inflation or
slightly above. It's just a
very high quality,
diversified cash flow
stream, and so that's
how I think about the
business.
G&D:
IWG is another name in
your portfolio that
interested us given the
contentious nature of the
industry it operates in.
YN:
International Workplace
Group is a bigger version
of WeWork that's been
around for longer, but
many people haven't
heard of. They operate
flexible hybrid office
space around the world,
with over 3k locations,
and have been around
for over thirty years.
Their brands include
(Continued on page 49)
the hygienist market in
the US and in Canada
tightened meaningfully,
as older ones retired,
and new ones delayed
enrollment into training
programs. This caused
wages to accelerate,
which caught dental
practices offsides, hitting
their margins.
Lastly, dentalcorp’s
interest expense grew as
rates rose. These three
headwinds caused the
company to miss
consensus estimates in
an environment that has
not been very forgiving
to illiquid stocks.
While early IPO investors
were willing to accept
low float at first, they
assumed that the
company’s sponsor
would further sell down
its stake, increasing the
liquidity. However, given
the decline in share
price, those sponsor-
secondaries are now on
an indefinite hold. This
has driven some of the
IPO investors to exit
their positions. At the
same time, many new
potential owners have
been unable to initiate
positions due to liquidity
constraints. All these
issues should change
with time.
Importantly, dentalcorp
has traded down to what
should be a trough
multiple. It sells for a
high single digit free
cash flow multiple today,
which is too cheap for a
business of this quality.
Margins will recover into
2024 and FCF is now
being deployed at much
lower multiples. The
company has also fixed
75% of its interest
expense, making it less
susceptible to rates
going forward. For these Page 48
reasons, the company
should grow free cash
flow per share at
attractive rates in 2024
and beyond.
As FCF per share grows,
the stock should follow
even if the multiple stays
at currently depressed
levels. Eventually, the
shares will get to a level
where the company’s
sponsor is comfortable
further selling down its
stake. As liquidity
improves, larger funds
will be able to look at
the company once again.
In my view, this will
drive the multiple back
to a more typical level
for DSOs. However, even
without multiple
expansion, growth in
free cash flow per share
should be enough to
deliver a satisfactory
return from today’s
prices.
Today, dentalcorp trades
at half that multiple that
a scaled DSO platform
typically demands in
private transactions. It is
bigger and more
diversified than most.
What’s more, if run for
cash flow, EBITDA would
be much higher, as the
significant expenses
associated with the M&A
team would no longer be
necessary. There's a
wide margin of safety in
terms of valuation. The
business quality is high.
I think there's a lot of
growth ahead, both
organic and via M&A. I
like buying high quality
businesses below market
multiples and this checks
all the boxes.
G&D:
How do you get
comfortable with the
long-term earnings
trajectory of dentalcorp?
YN:
Dentistry is something
people need and don’t
stop spending on even
when times are tough.
There are some elective
procedures that people
defer, but for the most
part, cleanings, and
cavities must be
addressed. Technological
obsolescence risk is very
low. AI is not going to
kill the need to keep
your teeth in good
condition. It’s highly
diversified in terms of
customers. It has
millions of customers,
and thousands of doctors
and hygienists. When
thinking about the
quality of the business, it
checks many of the
boxes. It can grow
pricing with inflation or
slightly above. It's just a
very high quality,
diversified cash flow
stream, and so that's
how I think about the
business.