National Bank Initiate Coverage National Bank Financial analyst Endri Leno thinks Dentalcorp Holdings Ltd. provides investors the opportunity to participate in the slowly increasing consolidation of the Canadian dental industry that could last for the next 30 years.
The Toronto-based company, currently the largest provider of dental services in the country, controls just 3.5 per cent of a market that he estimates is only 6 per cent consolidated (or owned by corporations). However, its share is rising with its ambitious pace of acqusitions (75-85 practices per year).
“Dentalcorp is well-positioned to execute its acquisition strategy within the $17-$18 billion Canadian dental industry, which, positively, features 1) a cash pay model; 2) high (private) insurance coverage rates (65 per cent to 75 per cent of Canadians); and 3) frequent repeat visits (65 per cent to 75 per cent of Canadians have seen a dentist in the last 12 months),” said Mr. Leno. “While the industry is mature (2 per cent to 2.5-per-cent CAGR [compound annual growth rate] in the last decade) with growth relying on price increases and general population increases, DNTL also uses customer acquisition technology platforms to drive incremental organic growth of 0.5 per cent to 1.5 per cent.
“During our due diligence interviews the overwhelming consensus was that dentalcorp, among other attributes, 1) is the leading consolidator; 2) has the best network of dental practices; 3) provides full autonomy on how individual clinics provide care; and 4) consults dentists in its network on best practices. We also heard that, being the most active/lead corporate consolidator, DNTL has had a head start versus its competitors for quality assets. Of late, other consolidators are acquiring more actively and are bidding up multiples to build up their networks.”
Mr. Leno initiated coverage of Dentalcorp with an “outperform” rating, pointing to a series of attributes: “1) the positive industry fundamentals, 2) opportunity to participate in the consolidation of the Canadian dental market, 3) long-term visibility for acquisitions, 4) relative quality of assets, and 5) continued growth, do override at-the-moment potential concerns.”
He set a $18 target for its share, implying a 48-per-cent return. The current average on the Street is $19.10.