Smiles all round for dental group PSQ and their future growth prospects

Everyone needs a dentist at some point in their lives, and Pacific Smiles Group (ASX: PSQ) has 130 clinics that people can attend. The dental practice group has seen its key operating metrics trend positively towards pre-pandemic levels, and they have earned a spot in Emanuel Datt’s outperforming fund – Datt Capital.

The company listed on the ASX in November 2014 after raising $42.1 million at $1.30/share, in a well supporting listing that gave investors more than 30% uplift on the first day. At the time, PSQ had 42 dental practices, 250 dentists and 700 support staff that serviced around 400,000 patient appointments on an annual basis. This amounted to FY14 revenue of $59.1 million, EBITDA of $14.5 million, EBIT of $10.8 million and NPAT of $7.4 million.

Recently released FY23 results show how the company has managed to come out the other end of covid with its profitable growth story still intact. The 130 practice strong group has pulled together a net cash balance of $9.6 million, well up from a net debt position in FY22 of $6.7 million.

Patient fees came in at $270.5 million during FY23, up 19.5% from FY22’s $226.4 million. EBITDA was $24.1 million, substantially higher than FY22’s $11.3 million but still considerably lower than FY21’s $33.1 million.

An interesting metric to examine is the same centre patient fee growth, which grew 14.9% during FY23, and highlights Pacific Smiles’ ability to pass increasing costs on to patients – ideally at a higher margin than incurred. While this metric did contract 10.1% in FY22, that was after a monumental increase of 26% in FY21.

Emmanuel is also very keen on their pricing power, and how that has allowed them to battle through inflation without the impact that many other businesses have faced. He stated “Ultimately, with dental being a critical service, I think there is a strong ability to pass costs through to customers, making it almost inflation-resistant”.

At the core of PSQ’s business is how they attract dentists to their group, and why so many of these health practitioners choose Pacific Smiles Group as their place to practise dentistry. Emanuel recognises that the flexibility that they offer practitioners makes for a much higher quality of life. When you are running your own practice, it’s very difficult to take time off when you have patients to take care of costs to maintain. When you’re working in a team of 4-5 dentists in a venue that is corporate owned, there is more freedom without compromising business opportunities.

Emmanuel summarised it perfectly, stating “What Pacific Smiles really brings is professionalisation and standardisation to what I would say has pretty much been a ‘cottage industry’ in Australia.”

Since listing, the company has paid out 13 fully franked dividends for a total of $0.3345/share of capital returned to shareholders. After a brief hiatus from dividends during covid, PSQ is confident their consistency is once again here to stay, as it was for more than half a decade before the pandemic. They just announced an additional $0.0227/share dividend for payment in early October.

Emanuel believes the valuation represents value and looks forward to realising its upside. “We think that the market capitalisation of $220 million at present, it’s quite a modest EBITDA multiple of less than 10 times, so we think that this is pretty good value for a growing business with very clear advantages over their incumbents.”

Click here to view more videos from Emanuel Datt’s The Insider: Meet the Fund Manager session.

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