New report From TD 11$ TPQ1/F24: VALUATION DOES NOT REFLECT THE SOLID, STEADY IMPROVEMENTS AHEAD
We expect dentalcorp to deliver solid, steady improvements in revenue growth, margins, FCF/share, and leverage in the coming quarters and years, as it benefits from strong demand for its dental services, an attractive M&A environment, and past IT/corporate investments. With the stock trading at <8x EV/EBITDA and sporting a >10% FCF yield, we think investors would do well buying at these levels
CDCP is a slight headwind to F2024 revenue...F2024 guidance was mostly reiterated, except for revenue growth and SPRG, which is expected to be modestly lower due to some patients deferring appointments until they receive CDCP coverage (first co-hort of patients became eligible on May 1). Q2/F24 revenue growth and SPRG was also modestly negatively impacted by this dynamic, but management expects SPRG to return to its medium-term target of >4% in H2/F24.
Accordingly, based on ~C$20mm in acquired Adj. EBITDA (pre-IFRS 16) and actual/guided SPRG this year, the implied F2024 revenue growth and SPRG guidance falls to the ~8% (from 9.5%-10.5%) and ~3% (from >4%) ranges, respectively. Management indicated that their revenue opportunity for F2024 and F2025 has not changed, with a relatively small amount of revenue shifting from F2024 to F2025.
...but is expected to be positive longer-term. Despite the lowered F2024 revenue growth/ SPRG guidance due solely to CDCP-related appointment delays, dentalcorp believes the CDCP should be a net positive in the long run, given it expands access to dental care and thus grows its total addressable market.
The company indicated that plan adoption by its dentists is above the current ~20%-25% national average, and its national footprint should allow it to capture a greater share of the market through this program over time.
Based on dental association guidance in various provinces, dentalcorp reaffirmed that CDCP patients would be required to pay the difference between market rates (based on provincial fee guides) and the CDCP coverage rate.
Capital gains tax change is encouraging sellers to seek early exits. With the capital gains tax increase set to take effect on June 25, dentalcorp stated it has seen more active engagement from sellers due to the upcoming changes that has driven higher-than-normal deal flow. Despite increased interest by sellers, management indicated that it was keeping its M&A target for this year, including funding all M&A only with FCF, but we could see a pick-up in M&A activity (particularly larger deals that would be more significantly impacted by these changed) in Q2 ahead of the June 25 deadli