Q2/F25: TAKING ADVANTAGE OF A FAVOURABLE M&A MARKET
THE TD COWEN INSIGHT
DNTL continues to execute well on its self-funded M&A driven growth strategy that is delivering double-digit growth, margin expansion, solid FCF, and declining leverage. However, we do not think the share price reflects its strong (and defensive) fundamentals, given the discount valuation and ~9% FCF yield. We think DNTL is an attractive defensive growth story, and it remains one of our Top Picks.
Impact: NEUTRAL
Favourable M&A environment. DNTL acquired ~C$3.8mm in PF Adjusted EBITDA after rent in Q2, below its guidance of ~C$6mm+ due to some deals getting pushed into Q3 due to timing (e.g., selling dentists being away on vacation near quarter-end). It paid an attractive multiple of ~6.3x EBITDA, below the ~7.0x-7.5x historical range, helped by the acquired practices being smaller than average.
However, DNTL has had a fast start to Q3 (despite the summer months), as it has already closed C$5.5mm of PF Adjusted EBITDA after rent (7 practices), aided by the closing of the delayed deals from Q2. The Q3 deal valuations are also below the historical range but DNTL expects the balance of deals this year to be in the typical 7.0x-7.5x range.
When adding signed LOIs, DNTL has now achieved its target of acquiring C$25mm+ of PF Adjusted EBITDA after rent, with F2025 M&A likely to add ~C$25mm-C$30mm in PF Adjusted EBITDA after rent.
Leverage nearing its medium-term target of 3.0x-3.5x. Net Debt/PF Adjusted EBITDA after rent continues to trend down and ended Q2 at 3.65x, down from 3.77x LQ and 4.11x LY. DNTL still expects to reach the upper end of this range by year-end.
Once leverage hits this range, DNTL plans to redeploy excess capital toward accelerating growth initiatives, primarily through increased M&A activity.
Underappreciated defensive growth story. Given the ongoing trade war and potential economic headwinds, we think DNTL's predictable, defensive business model that continues to deliver double-digit growth is flying under the radar with investors.
With >90% of revenue being non-discretionary (e.g., cleaning/hygiene) and now, unlike past downturns, the CDCP providing a buffer should its patients lose their jobs and thus access to employer-sponsored dental benefits, we think DNTL has a solid, stable base of revenue that continues to grow in the double-digits, aided by its active M&A program.
Minor revisions to our forecasts. Our F2025 revenue and Adjusted EBITDA forecasts are unchanged with our F2026 estimates up slightly due to a modest increase in assumed M&A activity in F2025.