While Dentalcorp Holdings Ltd. finally saw a return of capacity to “normal levels” following COVID-19-related restrictions in the fourth quarter of 2022, Canaccord Genuity analyst Tania Armstrong-Whitworth warned its a severe flu season is likely to weigh on results.
“Last year’s flu season, which began in mid-October and lasted through December, was one of the worst on record,” she said. “Patient and provider behaviour was the same as if they had COVID-19. As such, cancellation rates were significantly above normal and similar to levels seen during the Omicron wave in late-2021 to early-2022. Unfortunately, this more than offset any positive impact from increased hygiene capacity.
“With the flu season now behind us and the benefit of increased hygiene capacity flowing through to this year, DNTL has seen same-practice volume growth rebound to 3-per-cent-plus year-over-year in Q1. Alongside price increases that took effect at the beginning of 2023, management believes revenue growth this year could be at or above 4 per cent year-over-year.”
Following recent meetings with the Toronto-based company ahead of Thursday morning’s quarterly release, Ms. Armstrong-Whitworth reduced her same-practice sales growth forecast from 3 per cent year-over-year to nil.
“This assumes the flu had a similar impact on volumes as Omicron,” she said. “We believe this is conservative, considering the elimination of hygiene restrictions and 2022 price increases could have had a somewhat offsetting effect. Still, we’d prefer to err on the side of caution. Leaving our M&A estimate unchanged at $46.9-million pro forma revenue acquired through the quarter results in our Q4 revenue estimate declining from $353.9-million to $330.6-million. This compares to consensus at $334.7-million. We’ve left our operating costs forecast unchanged, therefore, based on the lower top line, our Q4 adjusted EBITDA (IFRS) estimate drops from $65.5-million to $60.6-million (18-per-cent margin). This compares to consensus at $61.6-million.
“Looking forward to this year, we project price increases implemented at the start of 2023 and higher frequency patient visits driven by increased capacity beginning in Q4 will produce 4-per-cent year-over-year same-practice sales growth. This is up from our estimate of 3.5 per cent previously. Nonetheless, our full-year revenue estimate declines from $1,469.0-million to $1,449.2-million, given the lower starting base in Q4. We’ve also modestly reduced our gross profit margin forecast for 2023 from 49.3 per cent to 49.1 per cent given ongoing inflationary pressures. Together, this results in our 2023 adjusted EBITDA (IFRS) estimate declining from $277.1-million to $270.7-million (19-per-cent margin).”
Reiterating a “buy” recommendation for Dentalcorp shares, the analyst cut her target to $13.50 from $15.50. The average on the Street is $14.50.
“Based on multiple re-rating across the peer group, we are also reducing our 2023 EV/EBITDA target multiples to 14.0 times from 15.0 times (IFRS) and to 15.0 times from 16.0 times (US GAAP),” she said. “We believe this better reflects DNTL’s projected slower pace of M&A and resultant EBITDA growth over the near-term. When applied to our reduced 2023 adjusted EBITDA estimate, our PT declines ... Still, with an implied 70 per cent of potential upside from current levels, we reiterate our BUY rating.”