TSX:SLF - Post Discussion
Post by
retiredcf on Oct 05, 2021 12:31pm
RBC
Their current and upside scenario targets are $71 and $77. GLTA
We smile as SLF deploys capital into a dental provider
Our view: We have a positive view on SLF's acquisition of DentaQuest as this transaction further grows and diversifies the U.S. Group Benefits business. The transaction will double the revenues of SLF's U.S. employee benefits business and be immediately accretive to earnings with the potential for additional revenue synergies longer-term. Our estimates move up reflecting the inclusion of DentaQuest's results. We maintain our price target and Sector Perform rating.
Key points:
On October 3, SLF announced that it will be acquiring DentaQuest, a leader in the U.S. dental benefits market without issuing equity for the deal. SLF will acquire the business for a total transaction value of US$2.475 billion (or ~C$3.1 billion), financed using 40% cash and 60% subordinated debt. SLF also plans to inject ~US$250 million of capital into the business. The transaction is expected to close in H1/22.
The purchase price of US$2.475 billion implies a P/E multiple of ~19x DentaQuest's earnings before synergies. Our math is based on the disclosed EPS accretion in 2022 from DentaQuest excluding the disclosed amortization of acquired intangibles, assumed financing costs, and assumed expense synergies realized in the first year.
SLF expects underlying EPS accretion of C$0.17 per share in 2022 (on a full year basis) and C$0.24 per share in 2024 once all expense synergies are realized but this includes a relatively significant impact from the amortization of acquired intangibles. SLF's underlying EPS definition includes the amortization of acquired intangibles, which is expected to be -C$0.10 per share in both 2022 and 2024. SLF also expects the transaction to add 42 bps to underlying ROE (on a full year basis) in 2022 and 50 bps in 2024. SLF estimates expense synergies of US$60 million (pre-tax) mainly driven by operational efficiencies. There will be no system or product conversions and DentaQuest's team will join SLF's existing management team in the U.S. There may also be potential revenue synergies realized through combining capabilities.
Overall, this acquisition is expected to position SLF as a leading dental benefits provider in the U.S. DentaQuest currently has 33 million members across 36 states and hence, it will add scale and further diversify SLF's U.S. Group Benefits business with new capabilities, notably in the government program space. Management expects the U.S. business to contribute over 19% to underlying earnings (compared to ~16% in 2020) as a result of the transaction.
Our underlying EPS estimates move higher but our BVPS estimate changes are modest. Our price target remains at $71 and we maintain our Sector Perform rating. Our model is updated to include additional earnings from DentaQuest in the U.S. segment beginning Q3/22, partly offset by higher financing costs in Corporate. We also reflect the disclosed transaction and integration costs, assumed to be incurred evenly over 3 years.
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