26 August 2021
Dental Practice Values to Hold Up
I expect demand for dental appointments to surge immediately when lockdowns end in NSW, Victoria and Queensland. My observation of the annual and interim financials of a large number of dentists' practices from 1987 onwards revealed that patients are remarkably loyal to dentists, provided of course that practices are well run. Established practices will have retained their goodwill value through the Covid pandemic. Low interest rates are beneficial to sellers.
Small Animal Veterinary Practices Booming
Small animal veterinary practices have experienced boom conditions due to the explosion in the number of pet dogs during lockdown periods. The bonding which occurs between owners and pets will endure beyond Covid. Veterinary corporates continue to offer record prices for practices, despite difficulties in veterinary staffing. I expect Private Equity owned Vet Partners to either float onto the share market or be subject to a trade sale once we are clear of Covid. Anecdotal evidence points to significant staff shortages with increasing number of part time vets.
1300 Smiles Ltd To Sell Out To Abano Healthcare
As per its announcement to the ASX of 24 August 2021, 1300 Smiles (Smiles) is to be sold to Abano Healthcare. Abano was acquired by BGH Capital and its institutional partners including Ontario Teachers' pension Plan Board in 2020. Abano operates 106 dental practices in Australia, mostly under the Maven brand. Readers with long memories will recall that prior to its sale, New Zealand shareholders of Abano were becoming disenchanted with its Australian operations as new practice acquisitions had become non-earnings accretive. Smiles founder shareholders, being trusts controlled by Dr Daryl Homes, own 59.8 percent of shares so the shareholders vote in respect of sale is not in doubt.
Non-Founder shareholders are to receive $8.00 per share less any Special Dividend whereas Founder shareholders will receive $6.33 of which $0.81 is contingent on certain events occurring and less any special dividend.
Golden Handcuffs for Dr Holmes!
The founder shareholders have a right to retain 26.2% of their shares (26.2% of 59.8 = 15.67% of total shareholding) and have indicated that they intend to do so. This is also a condition of the sale along with differential payment and contingencies. These may be interpreted as forming 'Golden Handcuffs' to ensure that founder Daryl Holmes remains with the company for a specified time to ensure continuity of operation. 1300 Smiles has been very much dependent on Dr Holmes who has been a driving force.
The exit plan is always challenging for a majority shareholder and managing director as a profitable efficient operation will run the risk of developing loose management with rising expenses when no longer under the tight grip of a majority owner. Buyers foresee this risk and have ensured that there remain significant financial imperatives to ensure good business performance during the early part of new ownership.
Small Size
Smiles is quite a small dental corporate, comprising 33 practices in 2021 having bought six practices and sold six during the year. A further practice acquisition settled on 1 July. The total over the counter earnings of $65.8 million represented $1.99 Million per practice with contracted dentists retaining $20.8 Million leaving statutory revenue of $44.9 Million. Abano/Maven's existing Australian operation is much larger with 106 practices. We don't have a view of how successful this part of Abano is but given that then-Abano shareholders had become disenchanted with its acquisitions not being earnings accretive, we might conclude that it has been a good deal less effective per practice than Smiles.
Readers with long memories will also recall that what is now Maven was started as Dental Partners under founding CEO Mike Timoney, an English immigrant who had managed Bartercard in the UK, and who married a Gold Coast dental practice owner. He had started an earlier company, also called Dental Partners, which was quietly put to bed after some unflattering publicity. When the listed Dental Partners Ltd was bought out by New Zealand's Abano, Mike Timoney went with it in a managerial role. His association with Abano ended unhappily after Abano dispensed with his services and legal action ensued. It is the nature of such matters that they are normally settled with a confidentiality agreement. Mike Timoney later founded Smiles Inclusive which had a short disastrous life as a public listed company before sliding into administration and liquidation
Secrets Of Dental Success: Gaps In Practice Accountant's Advice Costly For Many
Perhaps surprisingly, many accountants with dental clients do not understand the key factors which enable some dental practice owners to be a great deal more successful than others. This is despite a multitude of accountants having signage proclaiming that they give business advice. Those familiar with the operation of accounting practices know that there is continual pressure within to complete sufficient annual accounts in order to meet the tax office deadlines for annual tax returns. For many dentists accounting advice is concentrated on how much tax to pay and when it is due. While an accountant might see something in a client's accounts that should be discussed with the client, the work schedule of yet to be completed financials and associated tax returns often mean that matters are only given cursory attention or passed over. Unless an accounting and financial services has senior staff who are separated from processing tax returns and able to concentrate on practice advice, their clients' need for business advice tend to be ignored.
My observation from meeting many dental and veterinary clients for the first time and discussing their financials with them was that most had substantial gaps in their knowledge of practice outcomes and could not explain some of the advice that they had received. While they were mostly competent practitioners, too often the lack of sound advice had cost them dearly. There are a huge number of accountants with a good knowledge of the taxation rules but only a small percentage have an adequate knowledge of the fundamental drivers of success in dental or veterinary practices. If a practice owner gets some of the basics of their practice business wrong from early years of ownership the compounding effect on their long-term financial success over 30 plus years of ownership is huge, often amounting to millions of dollars by retirement.
The book "Financial Success for Dentists" addresses key issues and may save a dentist a vast amount of money over the long term.
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.
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
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 owing 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.
Annual Financial Results
ARB's Booming Result
ARB achieved net profit after tax of $112.9 million, an increase of 97 percent over the previous year based on increased sales of 33.9 percent—an outstanding result. International air travel is almost at a standstill and easing of lockdown restrictions including interstate movement are likely once Covid vaccination targets are reached. This is expected to lead to a huge increase in 4WD holidaying. This is ARB's primary market, which also includes vehicles used by those living in mining towns, geologists and other remote dwellers. ARB has continued to increase its penetration into overseas markets. ARBs share price has recently been at record heights. I have long regarded ARB as my benchmark in good company management.
BHP Dividend and Substantial Changes
BHP announced a dividend of $2.00 US Fully Franked. This will be paid to Australian shareholders in Australian Dollars converted at an exchange rate determined as at 6 September 2021.
Simultaneous with its results, BHP announced agreement with Woodside Petroleum to transfer its oil and gas production business with BHP shareholders receiving shares in Woodside Petroleum Ltd. As a result of the transaction, BHP shareholders will receive shares in Woodside in the ratio 48 percent to BHP shareholders to 52 percent existing Woodside Petroleum shareholders.
Simultaneously BHP announced that it will proceed with the full development of its Jansen Potash mine in Canada.
BHP also announced that subject to necessary procedural steps, it will unwind its dual listing via the London Stock Exchange known a BHP PLC and subsequently all shares will trade as BHP Ltd on the Australian Securities Exchange. BHP is then expected to be the largest company listed on the ASX. This will bring to an end the structure associated with its BHP shareholders capital destroying merger with Billiton with many of the Billiton mines subsequently cast off into South 32.
Following these steps BHP will have three major arms being copper, iron ore and potash. It has also signified that it is seeking to expand its investment in nickel production.
BHP's share price has fallen recently mainly due to a significant fall in the iron ore price.
Carsales.Com Ltd Thriving During Covid Lockdowns
Carsales.Com Ltd an Australian company operating in Australia, Brazil and South Korea achieved an increase in net profit after tax of 11 percent for the past year. I remember when The Age and the Sydney Morning Herald carried huge advertising sections devoted to motor vehicles, job advertisements and real estate. on Wednesdays and Saturdays. These were referred to by financial analysts as 'rivers of gold'. The Fairfax owners were unaware of the emerging impact of the internet, and companies including Carsales.Com in which Lachlan Murdoch and James Packer were substantial shareholders, took away their advertising market destroying much of their profit.
Commonwealth Bank
Commonwealth Bank achieved an annual net profit of $8,843 million. As a result of profit and asset sales, it has built up surplus capital. In addition to declaring a final dividend of $2.00 per share fully franked, bringing full year dividends to $3.50 fully franked, it is conducting an off-market share buyback totalling $6.0 billion. The buyback which will probably occur at a discount of 14 percent to current share price is advantageous to pension paying superannuation funds due to the franking credits being worth 30 percent as opposed to the likely discounted purchase price of 14 percent. It is likely that shares tendered into the buyback will far exceed the amount of buyback and hence is likely to be pared back.
Mineral Resources
Mineral Resources achieved net profit after tax of $1,103 million. It is paying a fully franked final dividend of $1.75 bringing total dividends for the year to $2.50 fully franked. Mineral Resources mines iron ore and lithium, and also operates a substantial mining services business providing ore crushing haulage and maritime services. This company has the attributes of a well-run business with expanding production, albeit that it has experienced difficulties recently in sourcing sufficient drivers for its huge iron ore road trains hauling 320 tonnes per trip.
Spark Infrastructure Stapled Security Interim Distribution and Buy Out
Spark announced an interim distribution/interest payment of 6.25 cents per security partially franked. This has been followed by acceptance of a buyout proposal via a scheme of arrangement priced at $2.95 which includes the interim distribution and special distribution. Unit holders should read the announcements carefully.
General Advice
Advice on investments is general advice and readers must do additional research of their own accessing broker reports and taking professional advice as necessary. All investors must have a deep knowledge of individual company financial performance, business strategy and economic risk. Investment decisions must also relate to individual circumstances including net assets, annual income and years to retirement.
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. 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
Graham Middleton
