Dentalcorp

Serial Acquirer in a Fragmented & Resilient Healthcare Market

Only Got 5 Minutes?

Here’s what you need to know:

• Dentalcorp is the clear leader and acquirer of choice in a fragmented Canadian dental industry that is only 6% consolidated, with a further 93% of the industry being private practices (and acquisition targets).

• Dentalcorp operates in a $20bn, recession-resistant & cash-flowing industry that offers plenty of growth ahead, with potential opportunities outside dental acquisitions.

• The company has acquired 535 practices to date, with a further 170 in negotiation and 8-10K+ more that meet acquisition criteria.

• Industry-leading scale provides dentalcorp the advantage over competitors, and feeds the acquire, integrate, & grow flywheel at the core of dentalcorp’s business model.

• Management has done an excellent job executing on the business model, with experience in M&A and high-insider ownership serving as further green flags for prospective investors.

• Shares have been hammered by a (potentially unwarranted) beatdown on the company’s highly leveraged balanced sheet, as well as a short-term exodus from arbitrage investors.

• Margins and capital efficiency metrics have grown substantially over the short time since dentalcorp’s 2017 IPO, while incredible growth in free cash flows and cash from operations help alleviate concerns over debt risks.

  Sound interesting? Read on for the full story.

Introduction

“How do you make money? Spinoffs, split-ups, liquidations, mergers and acquisitions.”

-Mario Gabelli

Dentalcorp isn’t the most exciting company I’ve ever covered. This isn’t a company that’s changing the world, disrupting a legacy industry, or innovating a new product that will revolutionize the world.

What dentalcorp does, plain and simple, is acquire Canadian dental practices. And as incredibly boring as this is, it may also make for an incredibly valuable investment opportunity, so long as dentalcorp is able to execute.

The Canadian dental industry is incredibly fragmented, resilient to market cycles, and ripe for consolidation. Despite this, dentalcorp is down nearly 39% YTD; let’s dive in and find out why investors may be overlooking this hidden Canadian dental leader.

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*Disclaimer: I am not a financial advisor, planner, analyst, or any other certification related to finance. This article, and everything else from Hourglass Investing, is intended for research and entertainment purposes only. Please don’t make any investment decisions based solely on what you read.*

**Disclaimer: I do own shares in dentalcorp and as such may have optimism for or bias towards the company’s future potential for success**

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dentalcorp

As of Writing:

• Market Cap: ~$1.1bn

• Enterprise Value: ~$2.4bn

• Revenues: $1.37bn (+21% YoY)

• Gross Margins: 48.2%

• P/E: Not Profitable

• EV/S: 1.9x

• P/S: 0.84x

Note: As dentalcorp is a Canadian co., all dollar values will be in $CAD, unless otherwise stated.

The Company

Dentalcorp was founded in 2011 by founder and current CEO Graham Rosenberg with the sole mission of rolling up the fragmented dental care industry in Canada. The mission, so far, seems to be going well; dentalcorp has been named one of Canada’s best managed companies by Deloitte for eight consecutive years.

The growth story has been quite incredible as well - dentalcorp had just 10 dental practices under its wings the year it was founded. Two years later, it was already Canada’s largest dental service organization (DSO), and now, just 12 years later, the company has 535 dental practices across Canada.

This growth was further fueled by a 2021 IPO on the Toronto Stock Exchange. Since then, the company has delivered a whopping -60% blow to early shareholders, compared to a ~1% increase in the TSX over that same time. Many of these concerns have come down to a highly leveraged balance sheet that’s served to spook more wary investors in the current macro-economic environment and rising interest rates.

Despite the returns and the risk, the growth opportunity here for dentalcorp is still very much alive; already the clear leader in this space (within Canada), dentalcorp has only penetrated around 3.5% of the total potential market, with their top 2-5 competitors eating up another 3.1% combined.

That leaves a whopping 94.4% of Canada’s dental market up for grabs - dentalcorp’s mission to consolidate this market still has lots of runway, and recognition for adept management should help to further charge these efforts.

Company Grade: A

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The Business

“Leveraging our industry-leading technology, know-how and scale, we offer professionals the unique opportunity to retain their clinical autonomy while unlocking their potential for future growth, while aiming to deliver the best patient experience and clinical outcomes.”

-dentalcorp ‘22 Annual Report

Business Model

Dentalcorp’s business model is fantastically simple: acquire, integrate, and scale. The flywheel at the core of this acquisition growth model is beautiful, and one of the reasons I like rollup firms so much:

Boom. That’s it. Simple, easy to understand, and effective. And dentalcorp’s execution of this flywheel has clearly been quite effective in helping the company grow.

Organic growth, which hovers around 4%, is perhaps the most crucial part of dentalcorp’s flywheel and is largely driven by the benefits of scale that dentalcorp is able to offer acquired practices. Post-acquisition, clinics are able to:

• Expand EBITDA margins by 15% on day one

  • Cheaper supplies & services

  • Reduced marketing & spend

  • Other cost synergies driven by dentalcorp’s scale

• Drive higher revenues

  • Expanded service offerings through dentalcorp network (orthodontics, implants, etc.)

  • 15% growth in visitation from access to dentalcorp’s technology platforms

  • Utilize dentalcorp resources to provide training to dentists, expanding the offerings they are able to provide and in turn the amount of revenues they keep in-house without referring patients to other clinics.

As a result of these benefits and the organic growth rates that they drive, the appeal of joining the dentalcorp network is made much more attractive to prospective acquisitions, which ultimately serves to benefit dentalcorp. And the organic growth doesn’t just offer more potential acquisition targets - dentalcorp is also able to use these organic growth figures to increase revenues, lower effective purchase multiples on their acquisitions, and create inherently more valuable assets under their umbrella, all of which vastly increase the intrinsic value of the company.

If all that wasn’t enough, the extra cash flows that organic growth is able to squeeze from each individual unit in the network are further able to fuel dentalcorp’s strategy of growth through acquisition. As dentalcorp acquires more practices and further expands their scale, the benefits they offer to drive organic growth are further amplified: more willing acquisition targets and multiples, better margins and revenues for practices, a more valuable dentalcorp network, etc etc. And so the flywheel stays in motion, driven largely by the effects of those organic growth figures and further emphasizing the importance of this figure in driving dentalcorp’s business model.

A key aspect of that organic growth is driven by dentalcorp’s investments into technology, so let’s dive into that.

Technology

These technologies are also crucial to dentalcorp’s business model; hellodent helps potential customers locate dentalcorp providers near them, book appointments within a few minutes, and refer dentists to friends or families. For the sake of research (and the fact that I was a little overdue on a dental appointment), I went ahead and booked an appointment through hellodent. The process was seamless, required no phone call, and took about 2 minutes total, despite the fact that I hadn’t visited the practice I booked with before.

Also under dentalcorp’s technology umbrella is the dc engage platform, which serves as a customer relationship management platform that, naturally, leverages AI to reduce labour demand. This program allows practices to automate booking confirmations, appointment reminders, and follow-up bookings for the next required appointment.

Acquisitions

As acquisitions are the name of the game with dentalcorp and they are small purchases relative to the size of the entire company, I won’t focus on the individual practices bought but rather the overall acquisition strategy in this section.

Dentalcorp mostly targets larger dental practices that are located in dense and high-traffic areas, have positive Google ratings, earn approximately $2-$2.3m in revenues, and meet the other purchase criteria on EBITDA, revenue streams, and maturity.

Out of the 15K total practices in Canada, more than 93% are privately owned, approximately 2/3 meet dentalcorp’s criteria, and nearly 200 are in negotiation with dentalcorp to be acquired. As the scale of their business increases, more and more of these private practices will see the benefits of joining their network and ultimately expand the pool of potential acquisition targets.

They will occasionally also merge different acquisitions into one unit if there are potential synergies, which helps expand the pool of potential acquisition targets. For example, if a practice didn’t meet the criteria for revenue streams diversified between hygienists and dentists but was close to a dentalcorp office with free space to accommodate extra workers, they would consider that as a potential target.

Post-acquisition, dentalcorp doesn’t seek to rebrand the practice under its own name, but instead keeps the original name and branding of the clinic. This helps to ensure loyal customers continue coming back and to maintain that ‘small-town’ practice feeling, as opposed to a large corporate dentistry setting that may offput customers (even if that’s exactly what it is).

With set criteria and a restricted pool of candidates, dentalcorp’s acquisition strategy is both repeatable and disciplined, as well as effective, at least as far as selecting good practices. Dentalcorp has never had to sell off or cease operations at any of their dental care or hygiene clinics, though they have sold off 13 standalone orthodontic practices throughout 2023 to focus on higher-margin integration of ortho services into existing practices instead.

The potential for this acquisition strategy to drive returns should also improve in the current environment as multiples on standalone practices come down significantly alongside the rest of the market, the only con being that the debt needed to acquire firms has also gotten more expensive.

Expansion Strategies

Dentalcorp’s growth & expansion strategies are very much inline with strengthening the effectiveness of their flywheel and leaning into their business model:

• Acquisitions - More, More, More

• Improve Organic Growth

These both make sense - as the two strongest prongs in dentalcorp’s flywheel, increasing the number of acquisitions and improving organic growth rates would further the company’s growth and advantage over competitors. It’s unsurprising that these would be the company’s foci for growth, but a further peep into the company’s annual report also shows some other interesting expansion tidbits:

• Geographic Expansion into the U.S.

  • Estimated to be a USD $190bn market

• Expand into Other Healthcare Verticals in Canada

  • Veterinary care, optical care, medical aesthetics are all industries in the early stages of consolidation as well.

A peep into the company’s annual report also shows that they may at some point target expansion into the U.S. as well, though this is a much more competitive market for DSOs overall, with enough other and larger players than dentalcorp already established there that expansion into the U.S. could be extremely difficult, unviable, or even completely unbeneficial.

However, the expansion into other healthcare verticals is intriguing. This would allow dentalcorp to scale its already proven acquisition strategy and technology into other sectors while maintaining the initial investment thesis as a rollup of resilient and cash-flowing practices in fragmented Canadian industries.

I really like the potential on this expansion plan, but it’s definitely much further down the road if it comes at all. For now, dentalcorp is exclusively focused on strengthening the effectiveness of their flywheel to eat up more of the market share in the Canadian dental industry, where they still have a potentially massive growth runway ahead.

Competitive Advantage

Dentalcorp, being roughly the size of its top 2-5 competitors combined, is the clear leader in the Canadian dental rollup industry. As the leader, dentalcorp reaches a larger scale and subsequently has more resources than their competitors to allocate towards strengthening their flywheel. As they acquire more firms and expand organic growth rates, margins, and operational efficiencies within their network, this competitive advantage will only continue to grow.

Dentalcorp also has an extreme advantage over other DSOs in Canada as the only publicly traded company in the space, giving them access to a pool of resources that none of their competitors have. Even if a rival DSO came public now, they would still be significantly behind dentalcorp and, as a result, a less attractive investment opportunity. The competitive advantages that dentalcorp has stem from its beautiful and well-executed business model, and serve to cement it as a very appealing business.

Business Grade: A

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The Team

The Glassdoor rating for dentalcorp is fairly solid overall, particularly for a company with a total company umbrella spanning more than 10K employees. The company has a total rating of 70% and a 76% approval rating for founder and CEO Graham Rosenberg.

The majority of the reviews were overwhelmingly positive and spoke of strong corporate culture and independence. The majority of the critiques/complaints came from a lack of organization, managerial oversight and communication, or clear direction from management. For a company focused on growing through acquisitions, these are concerning reviews - as a shareholder, I keep an eye on the Glassdoor to see if this is a complaint that persists. Thankfully, more recent reviews have trended positively on this topic.

Dentalcorp has also been named one of Canada’s Best Managed Companies by the Canadian Best Managed program for the last eight years. While I always take these corporate awards with a grain of salt, dentalcorp would not be able to achieve this award for so many consecutive years if they were entirely inept, so I’ll take this as an encouraging sign.

Founder & CEO

On top of some decent ratings on Glassdoor, Graham Rosenberg was awarded the EY Entrepreneur of the Year for Ontario in both 2015 and 2023. While perhaps not as prestigious as similar awards in the United States where competition is fiercer, taking home this achievement not once but twice in a competitive landscape that includes Toronto, Canada’s entrepreneurial centre, is pretty impressive.

Rosenberg comes from a business background, earning a bachelor’s in business before going on to earn an MBA and a CPA designation. While I wasn’t able to find any information on his professional experience prior to founding dentalcorp, Rosenberg’s resume is impressive, even just focusing on his time with dentalcorp. He’s grown this company from the ground up, reimaged the Canadian dental landscape, and led dentalcorp through its IPO as part of the company’s journey to becoming the largest dental service organization in Canada. Pretty impressive stuff, and I always love to see a founder-led business.

Management

Now let’s dive into dentalcorp’s other executive members, with no one (other than Rosenberg) being more important to the success and direction of this business than Guy Amini, dentalcorp’s President and Corporate Secretary.

Amini has a pretty impressive resume, with experience in both corporate law and finance before he joined as President at dentalcorp in 2014. He serves as the operational leader for dentalcorp’s day-to-day, which includes managing the Operations, Practice, Marketing, Legal, People, and Communication teams. A pretty big job, but he seems well-qualified with his experience focusing on M&A in business and legal environments. His long tenure is a great sign as well, given the importance of his role in the organization.

Dentalcorp’s other essential executives are Nate Tchaplia (CFO), Matthew Miclea (COO), and Nicola Deall (CPO), all three of whom have fairly extensive experience. Tchaplia, like Amini, has a lot of experience working specifically with M&A, and I think having a CFO that is familiar with this sector specifically is a huge bonus. He’s also the longest-tenured executive member other than Amini and Rosenberg, having joined in 2015, and this is another important position that I believe is essential to maintain stability with.

The compensation packages for the management team are as follows:

The total compensation packages are pretty reasonable on a surface scratch, especially for a company that’s pulled down nearly $1.4bn in total revenues. The compensation plans are also mostly oriented towards equity-based awards that help align management with shareholders, and I really like seeing this compensation method over bloated salaries.

These shares are awarded based on company performance - revenue, Adj. EBITDA, and adj. FCF per share. I think these are very relevant metrics to analyze the success of dentalcorp, as it’s a young and growing company, and I especially like the FCF per share, as this is crucial to dentalcorp’s ability to continue growing. Unfortunately, this incentive plan is getting adjusted at the end of 2023 to award based on PF adj. EBITDA after Rent instead of adj. FCF per share. While this metric is still relevant, I’d definitely prefer the company to continue this focus on growing FCF per share as the North Star for success.

The other concern is the pretty substantial option-based awards that were handed out to executives in 2021. These are all out of the money, meaning that the share price has fallen below a level that it makes sense to redeeem them at - if/when shares make it back to that level or above, shareholders will have their pieces of the pie diluted somewhat. However, this is the price of doing business for maintaining talented management, and dentalcorp has done well to retain Amini, Tchaplia, and Rosenberg at the top spots, even if they need to pony up to keep them.

Overall, I like the management team and I see no glaring red flags from the compensation levels:

• Not egregiously expensive, even when factoring in the future dilution.

• Compensation has grown in-line with the growth and success of the company.

• Incentives and compensation are mostly aligned with shareholders, though the switch from adj. FCF per share is a bummer.

Capital Allocation

• Furthering Growth through Acquisition

• De-leveraging Balance Sheet

• Driving Operational Efficiencies

While committed to continuing to grow, dentalcorp’s management has also recognized that the stock’s downturn is largely the result of a highly leveraged balance sheet. As a result, they’ve got a sort of balancing act going on with their capital allocation strategy - continue to acquire practices while also working down debt on the balance sheet.

While normally I’d prefer a business to look more towards the long-term than worry about near-term concerns of a depressed share price, but in this case I actually appreciate that this is something they’re focusing on. Not only is a highly leveraged balance sheet very expensive in the current environment, but significantly undervalued shares, as I believe dentalcorp’s are, mean that management can’t issue equity without significantly more shareholder dilution involved. Being able to access equity would help contribute to furthering dentalcorp’s growth strategy, so I think this is a good choice for capital allocation.

The last point on driving operational efficiencies is management’s focus on driving cost synergies - for example, with mass procurement of equipment and consumables. They have a dedicated procurement team for just this purpose which has helped to drive these expenses as a percentage of a practice’s net revenues from 7.1% (pre-acquisition) to 5.1% after integration. I like that management’s committing its resources to these sort of efforts and committing to driving those organic growth rates to further attract practices and strengthen the business model.

Ownership

The ownership structure for dentalcorp is very friendly towards self-directed investors. Institutional ownership is fairly low, which often indicates a company is being overlooked by bigger investment firms and may therefore offer a more attractive entry price.

The one potential concern here is on the high ownership by venture capital/private equity. This can provide some benefits to dentalcorp, such as heavily involved investors that can offer guidance, funding, and network opportunities, but it comes at a price. These firms are typically not oriented towards long-term investments, but rather to achieving a targeted return and then exiting the position. With ownership nearing 40%, this could mean a pretty significant price dip when these firms begin to sell their stakes.

Despite the concerns from private equity & venture capital, insider ownership is pretty solid at more than 6%, while more than half the company being owned between insiders and retail investors is also great to see. Unfortunately, the insider activity on the name has been mostly sells in 2023, all from CEO Graham Rosenberg. There’ve been no sell-offs more recently, with the stock price hovering around $5.60, but no insiders have been eating up more shares either, which is never a great sign.

Team Grade: A-

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The Industry

Dentalcorp is operating in a quietly attractive industry - not only does it operate in a recession-resistant healthcare sector that is required spending for most Canadians (those with good hygiene, anyways), but it’s also structured to receive cash from clients upfront without having to deal with insurance companies, making the business more efficient, capital-light, and unworried about delinquencies or delayed payments. The industry is benefitting from the tailwinds of an aging population and higher spend per capita on dental hygiene as well.

The major tailwind to the dental industry, however, is the shift towards consolidation through dental service organizations (DSOs). Private practices make up 93% of the total market, making the industry ripe for consolidation. And there’s good reason for private practices to want to join a DSO:

• Acquired firms have access to more resources for training, which helps dentists advance their careers and helps patients get better results and more services from their dental provider.

• Practice owners maintain autonomy but are freed from worrying about regulatory complexities and administrative tasks to focus on providing better care and building relationships - this ultimately also feeds into increased visitation from customers.

• Access to platforms & technology (like hellodent and dc engage) offer the ability to reduce marketing spend while simultaneously growing patient numbers and revenues.

• A growing number of dental offices and an oversaturated labour market has created a highly competitive environment with lots of individual practices - joining a DSO allows practices to simultaneously gain a competitive edge and reduce competition.

Ultimately, joining a DSO stands to benefit practice owners enormously - they are free to focus on actual dentistry with none of the nonsense of business admin, marketing, or competition, all while making their business more profitable. It’s small wonder that the industry is quickly trending towards consolidation, which provides DSOs with significant tailwinds.

However, dentalcorp, as the largest DSO in Canada, stands to benefit the most from these tailwinds - the advantages of joining a DSO are amplified by scale, offering even more resources, even better technology, and ultimately more opportunities to grow a practice. The effect is to create more acquisition targets that are willing to join the dentalcorp network, which will feed into the company’s flywheel and further their growth and competitive advantage.

Total Addressable Market (TAM)

The Canadian dental industry definitely isn’t a growthy market - it’s expected to grow at only a 2.4% CAGR through to 2026. Despite this, though, it still pulls in approximately $21bn in revenues per year - Dentalcorp, at just $1.4bn in revenues and 3.6% of the total market, is only a tiny player in this market, despite being the leader in DSOs.

Dentalcorp’s small piece of the pie is further evidenced by its 535 acquired practices out of the 15K total practices in Canada (93% private practices), as well as by the 2m Canadians that visit a dentalcorp office out of a total population of 38.5m. Dentalcorp’s low penetration into the dental industry means the business still has lots of runway to grow, despite the slow growth in the industry as a whole.

Competition

• Altima Dental

• 123Dentist

• Dental Choice

• Private practices

Dentalcorp massively outweighs its competition in the DSO space, and is as large as its top 2-5 competitors combined. The advantages gained from this massive lead were clearly recognized by dentalcorp’s two largest competitors - 123Dentist (which loses points for having a super lame name) and Altima Dental, which had previously merged with another DSO, Lapointe Group. The combined entity of what is now essentially three separate DSOs wrapped into one has ~350 practices under its umbrella.

This puts the merged corporation at a size that is still only 65% of dentalcorp (by practice) and further points towards the significant lead that dentalcorp has in the space. As the only publicly traded DSO in Canada, dentalcorp benefits significantly from access to a public float that the other firms do not have, even with private equity backers of their own.

Essentially, the real competition for dentalcorp comes from private practices, which still rake in the vast majority of the total revenues in the dental industry. Given that these are also dentalcorp’s acquisition targets, it puts them in a unique position of being able to eliminate competition while growing their own business in one fell strike.

While I think it’s worth keeping an eye on potential future mergers in the space that may help bring competition up to speed with dentalcorp, the current landscape has dentalcorp miles ahead of the competition and firmly entrenched as the most attractive acquirer for private dental offices.

Industry Grade: A+

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The Fundamentals

At a Glance:

• Revenues (TTM): $1.4bn (+17%)

• EBITDA (TTM): $151m (-7.2%)

• Total Shares Outstanding: 188m (3-yr CAGR: 6.5%)

• Free Cash Flow (TTM): $94m (-29.8%)

• Interest Coverage Ratio: 0.3

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Balance Sheet: The Good

Huge Amount of Profitable Assets

It helps to put any stress over liabilities to rest when considering the assets that dentalcorp has under its blanket. With a market cap of $1.1bn, dentalcorp’s total assets on the balance sheet triple the market value of the company at $3.3bn.

Cash Ratio

Dentalcorp sports a cash ratio of 0.5 - though this is a slight decline from its average of 0.8, this still suggests dentalcorp’s total cash reserves could pay off a decent amount of the debts if the company got into a tight spot.

Cash from Operations & FCF

Dentalcorp has seen some incredible growth in cash from operations and free cash flows, both really valuable metrics to determine the success of dentalcorp’s various drives for efficiency and the overall effectiveness of their growth strategy & flywheel.

Cash from operations have grown at a 58% CAGR since IPO, while FCF has grown at a 62% CAGR over those two and a bit years. This is stellar growth and points towards dentalcorp’s success and ability to continue growing into the future, and also help to dispel some of the concerns around the leveraged balance sheet.

Improving Margin Profile

Looking at dentalcorp’s short history as a publicly traded company, the margin expansion has been substantial, and definitely helps to demonstrate the effectiveness of their capital allocation efforts in this department.

While gross margins have basically hovered around that 48% mark, these are still pretty impressive margins for a consolidation business. The real cherry, though, is in the underlying operations becoming more efficient - net profit, operating, EBITDA, and free cash flow margins have all grown at stellar clips since 2021. The 11% EBITDA margins and 7% FCF margins are, I believe, the most relevant ones to pay attention to for this stage of dentalcorp’s growth, and they are both sitting at a decent mark and growing fast.

Improving Capital Efficiency Metrics

Returns on assets, invested capital, equity, and total capital all hover at or just below 0% - this is normal for a younger company completely focused on growth and not yet recognizing the full returns on its investments (particularly true for more recent acquisitions that dentalcorp has made).

Nevertheless, these metrics have been climbing from negative figures since coming public, and it would be especially encouraging to see that trend continue as dentalcorp matures.

Balance Sheet: The Bad & The Ugly

Lots of Debt

The main complaint on dentalcorp’s balance sheet revolves entirely around its leveraged balance sheet, with a few metrics helping to drive the point home:

• High D/E - 0.78

• Cash Flow/Debt - 0.1

• High Net Debt / EBITDA - 7x

Of particular concern here is the bottom-of-the-barrel cash flow/debt that shows dentalcorp’s current cash flows barely blink at their total debt levels, as well as the alarming 7x net debt/EBITDA ratio.

Debt is the name of the game with dentalcorp, and it adds a pretty significant level of risk that investors have to be comfortable accepting if they choose to invest - this is particularly true in the current macro-economic environment, which favours neither small-caps nor lots of debt.

Decline in EBITDA & Slowed Rev Growth

On TTM figures dentalcorp has registered a 7% decline in EBITDA, while revenue growth in the most recent quarter has slowed from 25% YoY to just 8% YoY. This is largely attributable to the current environment - though dentalcorp is recession-resistant, it’s not recession-proof. A lot of dental work is required spend for patients, but a lot of customers will be pinching pennies with the cost of living climbing so high, especially in Canada, and staving off their regular cleanings as a result.

Key Performance Indicators (KPIs)

Total Number of Practices

Dentalcorp’s network of practices sits at 535, and this is the first place investors should look in any new quarter updates. The number of acquired firms is everything to this company’s growth story, and is one of the key pillars of their flywheel.

Organic Growth Rate

The other foundational part of the flywheel is the organic growth rates, as I discussed in ‘The Business’ segment - nearly everything dentalcorp does builds upon their ability to fold practices under their wings and post strong organic growth rates. The company reports this typically hovers around 4% overall, with 15% EBITDA margin improvement and 15% visitation growth. Look for these figures to hover or expand - any decline should be seen as seriously concerning for the investment thesis.

Net Debt/EBITDA

The company has stated de-leveraging as a key capital allocation focus - I’d watch for this in the net debt/EBITDA ratio. The company reports this in their quarterly earnings as net debt/Adj. PF EBITDA after rent - while monitoring it on a pulled forward basis does help to see the effect of acquisitions on that figure, I prefer to monitor how this is going with rent, and a lowering figure should still show up in the non-adjusted net debt/EBITDA ratio as well.

Provider Retention Rates

The company has a 90%+ retention rate on care providers - this demonstrates the success of the people-first culture that dentalcorp flexes, a culture that’s important to maintaining skilled workers and continuing to grow the business. If this ever drops below 90%, I’d have some serious concerns on the business. Maintaining a reputation as a desirable organization to work for is central to dentalcorp’s ability to succeed.

Defense & Offense

Staff Retention & Development - Defense & Offense

This can almost be split into two categories - staff retention is all about keeping their employees happy. Providing a positive corporate culture, minimizing the time spent on crappy admin tasks, and providing equal (if not better) compensation packages helps to keep skilled workers in-house and drive a positive image for dentalcorp. In turn, this positive image can help to attract future acquisition targets (offense).

Additionally, dentalcorp’s resource pool allows them to provide pretty significant training and career opportunities to their staff. This further adds to the growth from retention and positive branding, but it also drives some pretty direct benefits for practices and dentalcorp alike. Through mini-MBAs, mentorships, and options for career advancement, on-the-job training, and skills development (implants, ortho, hygiene, etc.), clinics can offer more services without referring patients to other clinics. This keeps more patients at dentalcorp clinics (defense) and drives more revenue for the clinic, more cash flows for dentalcorp, and incentive for private practices to join the network (offense).

Scale - Defense & Offense

As I talked about in ‘The Business’ section, scale is the main competitive advantage for dentalcorp. It serves as both offense and defense by ensuring the benefits from joining the dentalcorp network are greater than those of any of their competitors. This ensures market share doesn’t fall to competitors while also eating up more market share themselves as the acquirer of choice.

Established Acquisition Framework - Offense

Dentalcorp’s proven and repeatable acquisition framework, not to mention the vast amount of M&A experience they have heading up the company, allow it to continue finding success with dentistry acquisitions. Pulling that growth lever offers significant upside potential for the business, but it could also be extended towards other healthcare verticals (veterinary, optical) to serve as even more offense for dentalcorp.

Driving Organic Growth - Offense

I’ve harped on for a while now about how crucial this figure is to the value of this company, so I won’t hammer the point too much more, but expanding the organic growth figures that dentalcorp is able to provide for acquired firms would be a huge form of offense.

Further developments towards driving new and recurring patient visits, improving margins, and/or finding cost & revenue synergies could help that organic growth figure climb above 4%, in turn attracting more private practices to the network while also growing the per practice cash flows that would fund further acquisitions.

Fundamentals Grade: B+

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The Investment

Valuation

Based on TMM figures:

• P/S: 0.75x

• EV/S: 1.6x

• EV/Adj. EBITDA: 8.7x

• FCF Yield: 5.9%

For a company with dentalcorp’s business model and growth runway, the trailing valuation on the business looks incredibly attractive. The underlying assets on the business ($3.3bn) outweigh the value that the market is currently giving the company ($1.1bn) by slightly more than 3x, while total sales over the last twelve months ($1.4bn) have also exceeded the market value.

The EV/adj. EBITDA ratio sits at a very attractive 8.7x that is well below the IPO multiple of 14x. Dentalcorp’s current multiples also look very undervalued when compared to the historical averages of 2x P/S, 29x EV/EBITDA, and a 4.9% FCF yield. A re-rate back to these multiples would drive some pretty significant upside for shareholders, though the averages can be taken with a grain of salt - they are taken off only two and a half-years of data, and dentalcorp went public in the middle of some pretty heightened valuations across the entire stock market.

Nonetheless, dentalcorp shares look cheap both historically and comparatively, as well as relative to the growth of the business. While the shares seem to have been beaten up largely due to concerns over debt levels, the punishment seems overdone when considering the quality of the underlying assets and industry.

There were also talks about a buyout of dentalcorp earlier in 2023, with the company even making some structural changes to go ahead with the sale. However, due to the cost of debts the deal did not go through - shares got sold off pretty heavily as arbitrage investors flocked out of the name. The stock hasn’t bounced back since, but I don’t believe this was worth the beatdown in prices either. Instead, the short-term views of some investors may provide buying opportunities to those that are willing to be patient and eat some risk.

Forward Valuation

Bear Model

If dentalcorp isn’t able to de-leverage meaningfully enough to spark renewed investor attention and sales multiples remain the same, with an assumed 5-yr holding period through to 2028:.

• I estimate the growth of the business based off the total acquisitions and low-end of the revenue criteria ($2m).

• Dentalcorp acquired 250 practices between 2018-2023. I cut this growth rate in half and add another 125 practices at $2m in revenue by 2028.

• This would put the business at 660 practices and $1.65bn in revenues.

• At a P/S ratio of 0.75x, the market cap of the business would be roughly $1.24bn. This would allow roughly 18% growth, or a 3.4% CAGR, a pretty dog investment overall.

Bull Model

If dentalcorp is able to re-capture the interest of investors and sales multiples return to the average levels, with an assumed 5-yr holding period through to 2028.

• I estimate the growth of the business to be the same as the above: 125 new practices folded into dentalcorp’s network at $2m a pop, putting the company at 660 clinics and $1.65bn in revenues by 2028.

• Then assuming a 2x multiple on the revenue figures, that would put dentalcorp at a $3.3bn market cap, with a total growth figure of 214.3%, or 25.7% compounded annually.

With 130 practices already in negotiation with dentalcorp to be acquired, I think the growth rate of +125 practices over the next 5-years could actually be quite conservative, and bumping up the average revenue figure even a tiny bit produces pretty drastic differences in the upside potential.

There’s a model that could be toyed around with where dentalcorp is able to achieve a higher acquisition rate and is still an attractive investment without multiple expansion - play around with the figures as you like, but to me the investment thesis mostly revolves around bouncing back from the extremely bearish sentiment on the stock right now.

My thesis is that this is likely, as I believe shares have been over-punished by the short-term exodus of arbitrage investors and somewhat unwarranted concerns over debts, considering the cash-flowing industry dentalcorp operates in.

Analysts

• High: $15.00 (+166%)

• Average: $11.57 (+105%)

• Low: $9.00 (+59.6%)

Analysts are clearly feeling optimistic about dentalcorp’s future growth, with even the low rating offering an attractive 60% upside from the current price of ~$5.60 and a net rating of Strong Buy.

As always, take analyst ratings with a grain of salt and don’t use their opinions as anything central to your investment thesis; analysts are human and likely to be wrong sometimes, but it’s still encouraging to know that professionals are seeing the opportunity for this company as well.

Risks to Share Performance

• Overpaying for acquisitions

  • Downside limited by individual acquisitions being small relative to total assets/network

• Reduction in Organic Growth Rates

• Reputational Damage

• Debts Reduce Ability to Continue Growing

  • Exposure to variable rates

Red Flags

• Higher leverage on the balance sheet

• Mostly Insider Selling

Green Flags

• Valuation

• Focus on de-leveraging

Investment Grade: A

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The Short Story

If this is a story investors can remain patient with, I think there’s a lot of upside ahead of dentalcorp. The current economic environment isn’t friendly to highly-leveraged companies, and dentalcorp is the definition of such a company. But the growth story and potential remain firmly in place - for investors that are willing to play the long game on this business and accept some heightened risk, volatility, and potential downside, I think the current prices offer an interesting entry point on the business.

I remain very bullish on the company overall. They are executing on an extremely attractive business model in a highly fragmented space that offers dentalcorp lots of growth runway. They operate with significant advantages over their nearest competitors, who even combined don’t come close to the scale of their network, and they are also benefitting from industry tailwinds that are increasingly favouring their rollup strategy.

The management team is experienced with mergers and acquisitions, with many of the executives having been with dentalcorp for a number of years as an added bonus. The ownership structure is favourable towards a fair- or under-valued entry point for self-directed investors, and this is reflected in the beaten down multiples on the stock, which are well below historical averages and the underlying assets & sales figures.

Considering the growth potential both inside and outside the dental industry, as well as the consistency of the dentalcorp team to execute on that potential over more than a decade, I think this is a really intriguing opportunity over the next several years. Now, it’s time for dentalcorp’s final report card before I sign off.

Report Card

Final Grade: A

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That’s all for dentalcorp folks! Happy investing and stay safe out there.

I’ll be back at you in two weeks diving into another fun business, but I don’t want to reveal it yet because I haven’t decided what it’s going to be yet! But keep an eye out for another Canadian consolidator…

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