Our view: Graham Rosenberg, Chairman & CEO, and Nate Tchaplia, CFO of dentalcorp presented at our conference this morning. Our discussion primarily focused on the a) organic growth b) COVID-19 impact on operations, c) acquisition pace and d) TAM. dentalcorp expects to achieve cash flow self-sufficiency within the next 24 months, which should enable the company to fund acquisitions without external financing. We rate DNTL Outperform with an $18 PT.
Double-digit revenue growth on the back of acquisitions; organic growth of 3.0-3.5% y/y. dentalcorp expects 3.0-3.5% of sustainable organic growth driven by price and volumes, aided by the company's in-sourcing agenda. Management estimates a ~$150-200MM revenue opportunity from ongoing orthodontics insourcing and will focus on insourcing implants over the next 12 months.
Impact of COVID-19 on operations. The company is still being impacted from COVID-19-led challenges due to regulatory restrictions (increase wait time between patients), which has a ~5-8% impact on hygiene capacity utilizations (~35-40% of overall revenues and higher ~60% GMs vs. ~40% GMs for dentistry). Management expects some of those restrictive regulations to ease over time resulting in a rebound in margins. Management expects EBITDA margins to reach ~18.5% by the end of 2022E and grow into high 19s to low 20s over the next 3-4 years.
$50MM acquired EBITDA (IFRS) in 2022; $35-40MM acquired EBITDA on a sustainable basis. The company noted that 1Q and 2Q will be outsized quarters in terms of acquisition due to timing of the larger multi- location purchases. After completing these acquisitions, dentalcorp will have proportional representation in Quebec, where it was historically under-indexed. Management acknowledged the acquisition multiples have gone up a bit, but noted that the company can derive returns on those investments well in excess of company's WACC. After acquisition, DNTL can get a ~5-15% lift in EBITDA through cost rationalization on supplies, labour efficiencies and ~3%-3.5% organic growth. The company expects to acquire on avg. $35-40MM of EBITDA per year on a sustained basis.
Guided for cash flow self-sufficiency within 24 months. dentalcorp expects to achieve cash flow self-sufficiency within the next 24 months (36 months since the IPO) and that should enable the company to fund acquisitions without any external financing. Management noted that in the case it expands into other verticals or expand geographically (US dental market), it will evaluate those opportunities with a view to achieve cash flow self-sufficiency within the 24 months.
TAM and market share in acquisitions. The dental industry in Canada is ~$18B and consists of ~15,000 practices. Management noted that their preferred acquisitions (multi-provider locations) would be ~10,000 practices. The dental industry in Canada remains fragmented with ~6% consolidation vs. ~20-25% consolidation in the US (which is also increasing). Management estimates ~500-600 practices are acquired every year and ~80% of the acquisitions are between dentists. DNTL estimates it has ~80% share in the remaining ~20% acquisitions. The company does not see US competitors entering the Canadian marketplace as a concern and feels strongly in its ability to continue to outperform on a sustained basis.