The dental industry of Australia is highly fragmented, comprising of mainly the dental practices that are small, independent businesses which are done without the support of any aid. About seventy percent of dental services in Australia are offered by dentists that do solo practices or in a very small partnerships. The competitive landscape for dental practices is rapidly changing, due to increase in the number of players leading to rising competition, which is expected to encourage the market participants to ask for better standard of services. This will encourage future acquisitions to gain market share.
Moreover, the solo dentists or small units are currently getting weaker on the back of stricter regulatory and compliance requirements. Further, the costs are rising due to increasing staff and facilities related expenses, which is making difficult for the average solo dentist to survive, and therefore, its market share is flat or shrinking from many years.
Meanwhile, the current situation is perfectly known to most dentists, especially the ones that have more than a few years of practice ahead of them. This is one of the reasons why the companies like 1300 Smiles Limited, Pacific Smiles Group Limited, Smiles Inclusive Ltd etc. are witnessing ongoing organic growth, as they attract more & more dentists to practice in their facilities that are of good standard, well equipped, established and has funds to sustain costs.
Let’s know about the three dental stocks in detail, to get a better insight on them.
1300 Smiles Limited (ASX: ONT)
Acquired two QLD practices: 1300 Smiles Limited (ASX: ONT), offers full-service dental facilities and management services in in New South Wales, South Australia, and in over 10 centers in Queensland Australia.
ONT intends to increase its presence into other locations across the Australian region. This can be achieved by both the establishment of its own new operations and also through the acquisition of existing dental practices. Most of the dentists that operate in the company are self-employed, who pay fees to ONT for the facilities and the full services that the company provides. The company has recently, in December last year, bought two regional practices in Gatton and Laidley, from SIL’s 100% owned subsidiary company Totally Smiles Pty Ltd. The acquisition will help the company to expand their trajectory in South-East Queensland region and the Lockyer Valley. The acquisition was funded through a combination of cash reserves and existing debt facilities, which is anticipated to have no significant impact on FY20 earnings.
FY 19 Financial Performance (Source: Company’s Report)
On 21 January 2020, ONT was trading flat at $6.100 (at AEDT 3:31 PM). Meanwhile ONT stock has fallen 4.39 percent in three months and is trading at a P/E ratio of 18.6x.
Pacific Smiles Group Limited (ASX: PSQ)
Revised Guidance for Fiscal 2020: Pacific Smiles Group Ltd (ASX: PSQ) manages local dental centres, in which independent practicing dentists offer both dental care and clinical services. The revenue is derived from the fees given by the dentists to use their branded well-equipped centers & facilities. The company has more than 90 dental centers that are spread in NSW, ACT, QLD & VIC, underpinned by more than 900 supporting staffs & more than 400 dentists. The company has a long-term target of operating 250 centers and capture more than 5% market share.
As per revised guidance for FY 20, the company expects same centre patient fee growth to be at high single digits. Though this growth is expected to reduce in the second half and comp versus stronger performance in H2 FY19. The first four months of trading are expected to be above expectations for both patient fees and EBITDA. Therefore, the company expects the underlying EBITDA of previous expected growth YOY of 6-12% has been to 8-14% YoY growth, this excludes the $500,000 projected impact of the network outage. The company in FY 20 expects to open 7-10 new dental centres, in which the company will open 4 new centres in the first half and further 3 in the second half of FY20. FY20 dividend payout ratio is projected to be in the range of 70%-100% of NPAT.
FY 20 Revised Guidance (Source: Company’s Report)
PSQ last traded on 20 January 2020 at a price of $1.755. Also, PSQ stock has risen 2.65% in the past three months period.
Smiles Inclusive Ltd (ASX: SIL)
Selling Its Centers: Smiles Inclusive Ltd (ASX: SIL) offers dental care through its network across Australia under the brand, Totally Smiles. The company is not based on traditional corporate acquisition model, but gain the benefits of a joint venture relationship in which the dentists or their nominees and transferees are enabled to share in the ongoing growth of their practice through a profit sharing ratio done through an agreement, and maintain their exposure to the capital value of the practice.
SIL has recently sold its Gatton and Laidley practices to 1300 Smiles Limited. The company had sold the centers at about 4% of the total purchase price that were paid for practices at IPO and at a small premium to book value. The company also intends to sale its Gympie and Toowoomba practices. The sale of centers is a part of its strategy to turnaround to profit from loss.
Also, the company in FY 19 had reported the loss of $31 million. FY 19 was disappointing on the back of reduced in revenue, increase in expenses, a shortage of working capital, reduction of staff that adversely affected the speed of recovery, some disengaged Joint Venture Partners (JVPs) and many disillusioned JVPs.
SIL last traded at a price of $0.52 on 20 January 2020. Moreover, SIL stock has given a return of 4.00 percent in the last 3 months duration.
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