(DNTL-T) C$6.79
Solid Q3; Focus Shifts to Deleveraging with M&A Plans Tempered Event
dentalcorp reported Q3/22 adj. EBITDA of $59.3mm, ~5% above TD/consensus estimate of $56.4mm/$56.6mm, reflecting stronger-than-expected EBITDA margin of 19.0% (TD: 18.0%) and roughly in-line revenue.
Impact: MIXED; target lower on higher interest rates and slower M&A cadence
Headline Q3/22 results were solid. However, in our view, the biggest takeaway in the release was management's decision to slow the acquisition cadence in Q4/22 and across 2023 (targeting $5mm-$7mm of acquired EBITDA/quarter), and to focus on deleveraging. This implies annual practice-level acquired EBITDA of $20mm- $30mm, down from ~$60mm anticipated for 2022. In our view, this is the right approach as investors have been laser-focused on DNTL's elevated balance sheet leverage (~4.3x with 6.5% average cost of debt, ~50% fixed) and have not been rewarding the company's valuation for the accelerated acquisition cadence across 2021/2022. Under the revised acquisition guidance, we still expect DNTL to generate strong double-digit EBITDA growth, and believe DNTL's multiple will expand as it demonstrates its ability to simultaneously deliver internally funded growth and deleveraging. In addition, we were encouraged to hear that practice valuations are declining as credit conditions tighten.
Revenue increased 24.7% y/y to $312.1mm (TD/consensus: $314.3mm/ $310.7mm), reflecting 2.2% SSSG (below TD's 4.0%, reflecting continued elevated patient cancellations) and 20.9% growth in the practice count y/y to 538. SSSG was impacted by ~20bps related to Hurricane Fiona (adj. SSSG: 2.4%). Practices in the Ortho Acceleration Program increased ~41% y/y to 268.
Practice acquisitions: During Q3/22, DNTL acquired 14 locations (primarily single locations) with ~$12.9mm of PF adj. EBITDA for a total consideration of $104.1mm. Year-to-date, DNTL has acquired 84 locations, which are expected to generate ~ $54mm in annual adj. EBITDA (40 acquisitions). dentalcorp's acquisition pipeline remains robust with 720+ total opportunities in its pipeline and 190+ in the more advanced stages of negotiation.
TD Investment Conclusion
We maintain our BUY recommendation, but lowered our target price to $13.00, reflecting revised estimates and lower multiple. We are attracted to dentalcorp's large and highly-fragmented Canadian market opportunity, and strong FCF profile, as a capital-light services business. Additionally, we view dentistry as a recurring, essential service, with expenditures resilient to changing economic conditions.