dentalcorp Holdings Ltd. (OTCPK, TSX:DNTL) owns dental practices across Canada and pursues a roll-up strategy to consolidate the fragmented industry. With 550 dental practices in its network, dentalcorp holds a 3.7% market share in Canada, making it the market leader.
Despite this, the company’s growth rate has slowed, burdened by significant debt and a Net debt to EBITDA ratio of 4.3x.
Recent Underperformance
dentalcorp’s growth has decelerated, with the company currently struggling with debt. Since November 2022, the company has not fulfilled its commitment to unlock shareholder value, as evidenced by the poor share price performance. Over the last three years, the company’s shares have been halved.
Despite attempts to leverage its market position, the company’s growth ambitions remain questionable, and concerns about its overall leverage persist.
In a letter to dentalcorp’s management, Buckley Capital Management, a U.S.-based investment firm owning 1.4% of the company, urged dentalcorp to undertake another strategic review process.
Buckley noted that the previous strategic review likely failed due to the March 2023 banking crisis and frozen credit markets, which made it challenging to consummate a deal. They believe that with the improved financing environment, dentalcorp is now in a stronger position to consider a transaction.
EBITDA Margin Contraction
At the RBC Global Healthcare Conference, dentalcorp emphasized potential margin expansion through significant investments in corporate infrastructure. Management noted the potential for around 20bps of margin expansion in 2024, growing to 25-30bps in subsequent years.
However, EBITDA margins have actually declined, dropping from 19.4% in December 2021 to 18.5% as of the last quarter. Despite positive adjusted EBITDA, the company has never earned a profit in terms of net income.
Financial Performance and Strategy
dentalcorp’s financial performance has shown significant challenges. Despite generating positive adjusted EBITDA, the company has consistently posted net losses. The adjustments from net income to adjusted EBITDA reveal that a substantial portion of the difference comes from adding back interest expenses and depreciation and amortization. For a highly leveraged business like dentalcorp, these interest expenses represent real costs, impacting the company’s true earnings and cash flow.
Valuation and Comparison
Currently, dentalcorp is trading at approximately 12.8x EV/EBITDA. For comparison, WELL Health Technologies and Neighbourly Pharmacy operate with similar dynamics and end markets. Neighbourly was acquired at 11x 2024E IFRS EBITDA, with a 3.6% FCF yield on trailing twelve-month free cash flow.
Assuming a similar acquisition multiple for dentalcorp, a takeout price of $15.00 per share could be estimated. However, on an EBITDA basis, dentalcorp trading above the acquired price implies downside due to higher free cash flow generation at Neighbourly.
Challenges and Future Outlook
dentalcorp faces significant challenges, particularly regarding its high leverage in a high-interest rate environment. The company’s leverage ratio of 4.3x poses substantial risk, despite an interest rate of 6.3%. Furthermore, same practice revenue growth has fluctuated, averaging around 3.4% post-IPO, despite CPI averaging 5.0% over the same period.
Although volumes are growing across the network, management needs to focus on deleveraging the balance sheet to improve investor sentiment and attract financial buyers.
Proceed With Caution
dentalcorp Holdings Ltd. continues to face significant challenges in delivering sustainable growth. Despite holding a leading market position in the dental industry, the company’s high leverage, fluctuating margins, and inconsistent financial performance raise concerns.
The current strategy has not yielded the expected results, and unless there is a substantial shift towards deleveraging and improving operational efficiency, significant share price appreciation seems unlikely. For now, dentalcorp remains a high-risk investment, and potential investors should be cautious.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
