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1300 Smiles (ASX:ONT) Stays Steady: FY 2018 Annual Results

2018-08-14T06:32:13+00:00

Dental aggregator 1300 Smiles announced a decent set of results today. Here are the highlights:

Over-the-counter revenue up 9.6% to $55.8 million (this includes revenue earned by the self employed dentists that 1300 Smiles provides services to).

Statutory revenue up 8.8% to $39.3 million

Dividends up 4.3% to 24 cents or a trailing twelve month yield of 3.6% based on the current share price.

Earnings-per-share (EPS) up 5% to 32.2 cents

Net profit after tax (NPAT) up 5% to $7.6 million

Free cash flow was $0.2 million compared to $3.6 million last year as the company ramped up its acquisition activity.

Operating cash flow was up 18.2% to $10.4 million

Net cash of $0.3 million

The following chart shows the relatively steady upward trajectory of the company over recent years barring the blip in 2013/2014 which was impacted by the withdrawal of the Chronic Disease Dental Scheme (CDDS). Note there is also a clear seasonality to the business with H1 typically stronger than H2. (Click image to view).

To be honest I’m a little disappointed with these results. I expected more growth given the company acquired five practices during the year on top of the five purchased in 2017.

The following chart shows the revenue contribution of the five acquisitions completed in 2018 split out from the total and the total revenue for 2017.

Clearly there is not much in the way of organic growth in 2018. In fact, the current year should have been boosted by the acquisitions made part way through 2017 so it looks as if the pre-existing business shrank. In particular, two orthodontists which settled on 30 June 2017 would have contributed nothing to 2017 and were expected to generate more than $2 million of revenues a year according to an ASX announcement dated 27 June 2017.

I would like to do a similar analysis for 2016/2017 but I can’t find a breakdown of the revenue contribution for the acquisitions completed in 2017 in the that year’s annual report.

I have some sympathy with the lack of organic growth. The company acquires when times are tough in order to take advantage of low prices and so it stands to reason that the group’s pre-existing businesses would also show some strain at these times. I expect organic growth to return as conditions improve and corporate activity tails off.

1300 Smiles remains a good quality business run by effective capital allocators as shown by the consistently high returns on capital it generates as per the following chart. Note the slump following the CDDS termination and recent declines on the back of the current acquisition spree.

I define return on capital employed (ROCE%) as earnings before interest and tax (EBIT) divided by the average of opening and closing net assets less cash plus debt.

One are worth exploring is the joint venture in Dentist Members Australia (DMA) that was disposed in the year for $400,000. 1300 Smiles previously owned 33% of the company with two other unnamed equal owners (given it is a joint venture rather than a minority interest). Presumably one of the other shareholders is Daryl Holmes as DMA is listed as a related entity in the Directors Remuneration Report.

Dentist Members Australia offers a voucher system to help patients spread the cost of treatment into manageable chunks. The business generated $1.2 million of revenue in 2017 up 30% on 2016 and 1300 Smiles’ share of profit was $88,000. Although this is immaterial in the contexts of the groups current revenues and profits, it hints at a promising beginning for the venture and it would have been good to receive an explanation for the disposal from management.

The nature of the disposal was also noteworthy given it was done through a vendor finance loan provided by 1300 Smiles at a fixed interest rate of 2% compared with in excess of 5% for all of the other loans receivable to the company.

Perhaps I am nitpicking and the bigger picture is that I expect revenue and profit to grow in 2019. This is because of full-year contributions from 2018 acquisitions as well as the Noosa one completed in July 2018. Also, the nine chair facility recently opened in Morayfield should add revenue, if not profit.

At the same time there is the potential for the company to realise synergies from the recent acquisitions improving profit margins. With a PE (price-to-earnings) ratio of around 20 times, the stock looks fairly valued to me given its track record of growing through all types of business environments.

I own 1300 Smiles shares and will be holding for the time being but may sell if something better comes along (I will not sell for at least 2 full trading days following the publication of this article).

As for Claude, he informs me he is content with these results and will continue to hold his shares.

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The Author of this piece, Matt Brazier, owns shares in 1300 Smiles. Claude Walker owns shares in 1300 Smiles. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

Is 1300 Smiles Limited (ASX:ONT) the best stock for ethical investors?

2014-10-12T12:47:40+00:00

I won't be posting much research on this website for a while, so it's fitting that I bow out with a public note on 1300 Smiles Limited (ASX: ONT).

But first, let me declare my bias. I like Dr Daryl Holmes, the CEO, on a personal level - he seems like a trustworthy person, and not just because of the exceptional value he has created for shareholders.

One CEO I quite like has a private driver whisk him away from the AGM - taking two beers for the road. Another has his own super yacht. But 1300 Smiles has a CEO who catches the train to meetings with bankers and speaks proudly of the charity boat he has helped fund and also helps staff as a dentist. As with Australian Ethical Investments Limited (ASX: AEF), not only are 1300 Smiles shareholders automatic philanthropists, but the profitable activities of the company help build a better society. That's because the company's strategy is to make dentistry services accessible to the widest possible segment of society, by keeping costs low.

It's the personnel - all of them - that make this company great, but shareholders and patients are also conspiring to support a good cause, because 5% of the ongoing payments received from all new members in the 1300 Smiles $1-a day Dental Care Plan are donated to YWAM Medical Ships. This ongoing funding will assist YWAM to address critical oral health problems in some of PNG’s most remote and vulnerable communities.

And before I touch on my recent chat with Dr Holmes, we should take a quick look at his best yet annual letter to shareholders. I particularly recommend his soap-box moments - they are essential to understand the numbers.

But first, here's my favourite bit (click image to enlarge):

Update 27/11/2014 -- The company has kindly included an updated graph of the Dental Care Plan Members in the AGM address by Dr Daryl Holmes (which I suggest you read).

And of course, we shareholders should always keep an eye on this important metric (click image to enlarge):

I met with Dr Holmes recently for a coffee and we covered a few different topics - nothing you can't find for yourself. However, I will give some of my impressions.

It seems possible debt might come into the mix again, now that the company is running a bit low on cash, after the excellent BOH Dental acquisition. As you might have guessed from past history, the company would consider taking alone if the right opportunity to acquire presents before cash is replenished. Dr Holmes attitude towards debt seems not to have changed.

On the subject of acquisitions, once you talk to Dr Holmes in person you can really see that he's still happy with the BOH acquisition - certainly, it appears we have brought on board some of the foremost talent in the industry. Even when some of the older dentists retire (and this goes for multiple practices) there seems to be top performing younger dentists ready to fill their shoes.

Like me, Dr Holmes is pleased with the recurring revenue generated by the Dental Health Care Plan, although we do take some credit risk with that one - a fact often forgotten in good times. Nonetheless, the inspired program is bringing in millions of dollars a year already, and it hasn't even been running for long! Shhhh....

As for valuation, well, I'm not in the mood to share, but I will say I am considering entering the market again myself (as a buyer, if this current sell-down spreads). We shareholders remain stubbornly attached to our holdings.

Possibly the biggest single reason for that is the top-notch capital allocator running the show. Buying a share in 1300 Smiles is giving your capital to Dr Holmes and his team to allocate it as they see fit. History shows that they buy and run dental practices profitably, with an eye to community wellbeing, and charitable hearts. At current prices, the dividend is superior to a bank account if you take into account franking credits, and I expect it will grow over time. I would rate the chances of shareholders being treated poorly as low.

One thing I thought was interesting is when asked about the company's investment in Dental Members Australia, Dr Holmes simply said it was an opportunistic bargain. The way I see it, if he keeps gradually expanding his circle of capital allocation competence, shareholders will probably do very well over time.

Thanks for reading everyone, but we're out of time.

The Author owns shares in 1300 Smiles. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

Please do follow me on twitter @claudedwalker.

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Initial coverage of 1300 Smiles Limited (ASX: ONT)

2013-10-24T07:12:41+00:00

1300 Smiles achieves excellent returns on investment and the Managing Director, Dr Daryl Holmes, appears to have a lot of integrity. He proudly supports charity and owns over 60% of the company, which he founded. The company boasts impressive earnings growth since listing in 2005. The company is providing low cost dental care. The business of the company is to help dentists run more more profitable businesses by allowing them to focus on what they do best: treat patients.

1300 Smiles can take care of the business needs of the dentists it employs, and the dentists it serves. This is includes running practices, employing administrative staff and allowing those dentists to use its brand. In North Queensland, where most 1300 Smiles practices are, the brand is certainly useful. I hear they like Rugby League up there...

Over the next few years, I believe the company will make up any lost revenue resulting from the end of the Chronic Dental Disease Scheme, which closed in December 2012. The balance sheet is strong, and management is making a serious attempt to make dental services more affordable for customers. That should have positive ramifications for investors and society alike. At the current price of $6.50 the company trades on a trailing dividend yield of about 2.8%, fully franked.

I first wrote about 1300 Smiles in this article when the shares were trading at about $5.80. At $6.50 I believe 1300 Smiles is decent value, although there may be better opportunities to buy shares. I think the Improving Smiles program is attractive to customers as it makes dental care more affordable to those who join. This company is in the process of building a brand. I think the value of this brand is not reflected on the balance sheet, but is rapidly becoming evident.

The Author owns shares in 1300 Smiles. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

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