Three dentist stocks compete for market share
Smiles Inclusive is the latest dentist IPO hit the ASX boards, joining listed competitors Pacific Smiles (PSQ) and 1300 Smiles (ONT)
Smiles Inclusive (ASX: SIL) was the latest dentist IPO to hit the ASX boards on April 27, joining listed competitors Pacific Smiles (ASX:PSQ) and 1300 Smiles (ASX:ONT), in an attempt to consolidate a fragmented industry. Smiles Inclusive raised $35 million via conventional IPO, fully underwritten by Morgans.
The dental industry remains highly fragmented with the majority of dental practices being small, independent businesses without much support and the company is planning to fill the gap by acting as the umbrella organisation of over 50 dental practices.
Totally Smiles - the subsidiary of Smiles Inclusive - raised to money to acquire 52 dental practices across nearly all states and territories of Australia. Each practice will become a Joint Venture with vendors re-investing a “substantial share” of the sale price into a profit sharing program. The mandatory rebranding program is designed to generate cost efficiencies, optimise operations and facilitate investments in technology and equipment.
The business model of Smiles Inclusive is to grow via acquisitions as the company seeks to expand its network in capital cities and rural areas. The success of this business model is dependent on management’s ability to identify value-added acquisition targets that fit into the broader strategy and create value for shareholders. Ongoing financing and access to debt will be required to support this growth strategy.
Valued at six times forecasted earnings, Smiles Inclusive’s indicative valuation is considerably “cheaper” than its listed peers, which are both valued at approximately 10-11x earnings. It may take considerable time to establish the new Totally Smiles brand and the discount appears fair in light of the company’s limited track record.
The competitive landscape for dental practises is changing and there is a risk that rising competition will encourage market participants to lower demanding standards for future acquisitions in order to gain market share. Debt can quickly spiral out of control if management gets greedy or individual practices fail to perform. ASX listed comparables have performed mixed over the past year, however the valuation is undemanding and a dynamic shift in positions can be expected.
Author: Simon Herrmann
Apr 17, 2018
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.