12 December 2022

Vet Shortage 

Australia is experiencing a shortage of veterinarians despite expanded numbers of university veterinary schools. There are two major reasons:

1.     The significant change in vet school enrolments of female veterinary students and changed attitudes to work life balance means that there are a much greater proportion of part time vets with many working parent friendly hours, and

2.     The large number of hard-working veterinary practice principals who were bought out by corporates and retired prematurely having banked their pot of gold and fulfilled their contractual work out conditions. Many of these not only did the work of a couple of young employed vets and administered their practices but were also adept at surgery whereas today many employed vets are ill equipped to do significant surgery.

The shortage of vets is causing massive problems for corporate owners with much anecdotal evidence of corporate practices having to restrict their number of appointments and their opening hours. Privately conducted practices with hard-working owners are experiencing boom level attendance by former clients of corporatized practices. It should alert any investment bankers/brokers contemplating in promoting renewed floats/initial public offerings accompanying stock market listing of a fundamental weakness of the corporate model. Vets selling to corporates and having work out periods as principal vets report that their corporate managers have extremely shallow knowledge of the way to run practices efficiently and leak clients as soon as the former principal has worked out their post-sale contract period.

Apiam Animal Health 

Apiam Animal Health continues to acquire practices, mainly dairy industry-, piggery- and large mixed animal-related. Their NPAT has grown to $6.7 million but the recent share price of 70 cents is a long way below its closing price of 26/08/2016 of $1.66, with a higher intraday price of $1.80. As they have bought more practices and issued more shares the return per share has struggled. There are few more challenging tasks than successfully maintaining profit per share in a greatly expanded network of geographically spread professional service providers including dairy/large/mixed animal practices. Earnings per share is 4.82 percent, which is low considering the degree of risk—particularly of vet staffing difficulties as principals of recently acquired practices fulfill earn out contracts and depart.

Corporate Buyer Mismanages Acquisition and Destroys Practice Goodwill 

A long- term owner of a successful practice sold to a corporate with a short earn out period. The former owner-cum-lead vet produced as many fees as the top two employed vets in addition to managing the practice. The owner completed earn out employment obligations and, having given the required contractual notice, retired to pursue hobbies and interests. Despite lengthy notice the corporate was unable to find an experienced replacement lead vet. Meanwhile the employed vets changed from 15 minute consultations to 30 minute consultations and many long-term clients can no longer get appointments. As the practice is now being run to the comfort of the staff collective, what was a highly profitable and valuable practice will plunge toward a loss maker destroying the value of goodwill.

Risk To Buyers of Repeat IPOs of Corporate Practice Networks 

If Private Equity owners of large numbers of practices try to on-sell via an IPO and stock market listing, hard questions must be asked about the changed pattern of fees and profit per veterinary practitioner and per practice and service restrictions due to vet shortages. Brokers and analysts may be dazzled by the opportunity and implementation fees and will paint an overly optimistic picture of the businesses. 

BHP Makes Increased Offer for Oz Minerals 

BHP has increased its buy-out offer and obtained support of the Oz Minerals board. The offer is subject to due diligence now that BHP has full access to Oz Minerals books but is anticipated to proceed, probably in about March 2023. Oz has gained permission to include a dividend as part of its payment which will utilize accrued franking credits. While the current share price of Oz Minerals is only around 3 percent below BHP’s offer price, the addition of franking credits on an anticipated dividend of about $2.00 (i.e. about 85.7 cents) suggests that purchasers at recent prices may benefit to the extent of about 6 percent by conclusion of the takeover. This is a good return to self- managed superannuation funds, particularly pension paying funds for a few months, albeit that there is a slight risk of the deal not completing. 

With capital markets all but dead it is only a company like BHP with enormous positive cash flows which can make a purchase of this scale. The attraction to BHP is that Oz Minerals main copper deposits are near to its major copper deposits in South Australia and offers significant advantages of scale in ore processing. BHP’s strategy is to own long- term mines in forward facing minerals even if it takes several years to open up and integrate new ore bodies.

I own both BHP and Oz Minerals shares in our family superannuation fund. Readers should do their own due diligence and take advice as required.

The Home Loan Repayment Shock to Come

The increase in interest rates won’t fully hit the Australian economy until late 2023. As many home buyers in the past couple of years elected to fix their mortgages for a maximum of three years at very low rates of between 1.8 and 2.3 percent, they will face a huge cash flow shock as mortgage repayments surge when they convert to market rates expected to be around 6 percent. The RBA estimate that about 15 percent of borrowers will be pushed into negative spare cash and risk defaulting on home loans. One third of borrowers will suffer a reduction in their spare cash of between 40 percent and 100 percent. According to CoreLogic data projections the epicenter of what it expects to be the biggest housing crash in modern Australian history has shifted from Sydney to Brisbane where recently prices have been falling at an incredible 20.3 percent per annum! Thus far, Sydney dwelling prices have fallen 11.1 percent from their peak in absolute terms, as per Christopher Joy in the Australian Financial Review 26-27 November.

CSL Touches $300 Per Share

CSL spends a huge amount on research and development. Those with an understanding of pharmaceutical products are advised to read its periodic announcements on the development of products toward regulatory clearance. A growing world population means a growing demand for pharmaceutical products. CSL appeals as a long-term growth stock.

In 2007, prior to the Global Financial Crisis, CSL split its shares, then worth about $105, into three shares each worth about $35. During the Covid crisis, CSL’s blood collections suffered and hence its production of blood plasma products suffered too, but these are now back on track. Growth in share price from $35 to $300 over a period of 15 years represents compound annual growth of 15.4 percent. There have also been regular modest dividends. I regard CSL as a far superior investment in the medical field to Ramsay Healthcare about which the proportion of its hospitals located in France worries me.

 I own CSL in our family superannuation fund and investment portfolio. Readers should do their own due diligence and take advice as required.

Have Dental Corporates Hit Their Performance Limits?

Recently I commented on the troubled outlook for Pacific Smiles Ltd. Founder—and still significant shareholder—Alex Abrahams has advocated the sale of half of its dental clinics to restore profitability. Subsequently, Dr Abrahams was reported to be challenging the re-election of current directors and leading a first strike action against director’s remuneration.

 It is now common dental knowledge that Maven are looking to sell several specialist clinics and some unprofitable clinics. Some of these may well become profitable after reversion to private ownership. Corporate head office distance from practices and additional tiers of management together with the loss of former owners who often ran the most profitable dental surgery/operatory have the impact of substantially reducing profit and in many cases turning formerly profitable practices into financial loss makers.

Prior to sale to current ownership, shareholders in Abano were complaining that Maven’s acquisitions had ceased to be earnings accretive. Abano probably did well to on-sell it. Maven was originally known as Dental Partners.

 Bupa is losing principal dentists and will probably reappraise dental strategy.

There is the recent disaster of Smiles Inclusive Ltd which slid into insolvency administration having failed to make a profit in any half year from its listing on the stock market. It was unable to satisfy the company auditors who refused to sign off its financials causing the ASX to suspend its listing which led to it being placed into administration. A surviving sliver of its practices was on-sold by the insolvency administrators.

Elsewhere Dr (not a dentist) Peter Hughes and his wife have parted company with Kikada Lane. Peter Hughes was previously manager of Ekera and parted company with it, apparently following differences over dental acquisitions.  

The world of corporate dentistry is far from a happy place.

Invisible Barriers 

Dental corporates hit invisible barriers where profit per practice begins to decline and ultimately the corporate chain risks becoming unprofitable. Corporate managers and boards become disconnected to what is actually happening inside practices. The only dentists that most stock broking analysts have ever met is the family dentist who drilled their teeth and they have demonstrated a serious lack of understanding as to the inherent weaknesses of corporatized accounting, dental, dental laboratory, orthopaedic surgery and veterinary practices and the inherent weaknesses of corporatization strategy of professional services businesses. Corporate medical general practice networks survive on their ability to influence the direction of referred pathology collection and radiology services rather than doctor’s fees.

The corporate limitation on dental, veterinary and medical surgical practices is that they cannot replace dentists, vets or surgeons with machines. A dentist can only work inside one patient’s mouth at a time. This contrasts with large businesses which have been able to replace multitudes of workers with automated systems and bigger machines.

Accountants’ Knowledge of Business Lacking!

Looking back a few years, the respective failures of corporatized and ASX listed accounting groups Stockford Accounting, Harts Australasia and Knights Insolvency all ended in insolvency, proving that accountants mistake doing tax returns with the skills required to establish and run a corporatized accounting group successfully. Most accountants have very little knowledge as to what makes some of their clients’ businesses profitable on a sustained basis.

Do not confuse an accounting firm’s reputation with the business knowledge of individual accountants, including partners. Over about 33 years I dealt with a large number of accountants and found that if professional clients, mainly veterinarians and dentists were to receive proper business advice I had to learn a great deal more about their practices and identify the features of successful practices and the mistakes of those who were unsuccessful because invariably their accountants lacked effective knowledge and were devoid of good business advice outside of telling them how much tax to pay. This led me into practice performance benchmarking and practice valuations. When I started valuing Australian vet practices, there was nobody else in the field and the best- known dental valuer was an equipment supplier who lacked the ability to interpret financials.

Dixon Advisory Clients to Receive a Pittance Under Deed of Company Arrangement (DOCA)

The insolvency administrators have told the failed group’s creditors who are current and former clients in Dixon’s ASX-listed US property fund that under the proposed DOCA they would receive between 3.1 and 4.4 cents per dollar of their investment. Dixon’s, which ran a substantial self- managed superannuation fund advisory business, had recommended that many clients invest in its US Master Residential Property Fund or URF which invested heavily in New York apartments and borrowed heavily to pay for refurbishment. As it transpired, Dixon’s understanding of the cut throat New York property market and ability to supervise refurbishment was lacking.

It is likely that post-DOCA there may be legal actions aimed at Dixon’s former director’s insurers and former auditor’s insurers if it can be proved that clients were advised to invest in the US property fund after it was known that the fund was in difficulty.

ARB Consistent Sales and Profit Growth

ARB’s profit after tax has increased in every consecutive financial year for 20 plus years, a remarkable performance. It’s share price zoomed but has now come back to long term fair value around $29 and it is on many brokers recommended list. Its business development with a continuous steam of new products concentrated at the quality end of the 4WD market, expanded manufacturing, warehousing and distribution facilities and consistency of business strategy indicate quality management. I strongly prefer it to Bapcor, a company with which it is often compared.

I own ARB shares in my family superannuation fund and investment portfolio and regard it as a long- term hold. Readers should do their own research and consult advisers as necessary.

Financial Success for Dentists

Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:

·      Understand key practice valuation criteria.

·      Learn how some dentists inadvertently reduce the value of their practice by $500,000

·      Avoid long term errors when purchasing your practice.

There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.

I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.

A complete and comprehensive career guide for mature and aspiring dentists.

Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.

—Merv Saultry, Founder Dental Innovations Network

To Obtain a Copy:

·      Go to the Delany Foundation website at http://www.delanyfoundation.org.au

·      Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.

·      Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address

·      A copy of the book will be mailed directly to you

All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.

The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.

Please Pass On

If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com

Independence And Disclosure

I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.

General Advice

I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. My website is now available at grahammiddleton.com.

Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.

Best wishes to all readers

Graham Middleton