Smiles Inclusive Limited

 
Trading Halt:Smiles Inclusive Limited (ASX: SIL) owns and operates fully serviced treatment rooms, providing materials, marketing and administrative services to dentists through the Totally Smiles Dental Group. The market capitalisation of the company stood at ~$3.4 million as on 23^rd September 2019. The securities of the company have been placed in trading halt at the Company’s request, pending it releasing an announcement about the outcome of the institutional component of the accelerated entitlement offer. The securities are supposed to remain in trading halt until the commencement of normal trading on 25th September 2019.

Financial Performance in FY19: Due to the unsuccessful implementation of the business model, the company reported a poor financial performance and required development of the Turnaround plan. The company reported a statutory loss after tax of $18.9 million and net impairment of $13.7 million. This poor performance in FY19 was primarily due to the (1) breakdown of relationships with some Joint Venture Partners (JVP’s) which led to a low level of engagement, and (2) operational issues within the mobile division which led to a temporary closure.


 Financial Performance (Source: Company Reports)

Financial Position: The company had a cash balance of $1.6 million as on 30^th June 2019 and drawn debt of $24 million.Due to ongoing performance issues and reduced access to capital, SIL announced a share placement on 20^th June 2019 and raised $1.2 million to help deliver the turnaround. The offer price for placement was $0.14 per fully paid ordinary share.

The Turnaround Plan: The turnaround plan was approved by the Board and primary bankers of Smiles in July 2019 and is currently being implemented.It has several discrete initiatives which vary in complexity and are going to be executed over the immediate, medium and long terms. In the report, it was added that the immediate initiatives are addressing the current specific issues and capitalising on those resources which are already in the business.
Stock performance:The company’s performance in FY19 was disappointing, however with the help of JVPs, staff, bankers and suppliers, every effort is being made to stabilise, consolidate and turnaround the business in FY20 and return it to acceptable level of performance. Currently, the stock is trading towards its 52-week low levels of $0.038. Hence, considering the aforesaid facts and current trading levels, we advise the investors to closely watch the stock at the current market price of A$0.060 per share (up 17.647% on 23^rd September 2019).
 

Pacific Smiles Group Limited

Decent Top-line Growth in FY19:Pacific Smiles Group Limited (ASX: PSQ) provides services and facilities to dental practitioners who practice at dental centres operated by Pacific Smiles. The market capitalisation of the company stood at ~$234.07 million as on 23^rd September 2019. The company reported revenue of $122.2 million up by 16.9%, which shows growth from new centres opened in FY18 and FY19 and strong patient fee growth in the same centres. The same centre patient fee witnessed a growth of 8.6%, which is above the company’s expected growth of ~5%.


 Income Statement (Source: Company Reports)

The total patient fees in FY19 was $187.4 million, which grew by 13.9% for the period, compared to the company’s guidance for FY19 of 10-15% growth.

Business Measures taken in FY19: 23 additional chairs were commissioned in existing centres to fulfil patient demand, up from the 14 added in FY18.The company rolled out 10 new dental centres in FY19. It also introduced automated sterilisation systems in all the centres to enhance clinical standards. To support multi-channel finance options for patients, Afterpay was introduced.

Outlook for FY20: The same centre patient fees growth is expected to be in high single-digit.The company is opening 7-10 new dental centres, with a strong pipeline, including 5 sites already committed for FY20. EBITDA is expected to increase by 6-12% in FY20.

Stock performance:On the stock performance front, it produced returns of 24.70% and 30.51% in the past three months and six months, respectively. The company has declared a fully franked final dividend of 3.5 cents per share, which is to be paid on 4^th October 2019. Currently, the stock is trading slightly towards its 52 weeks high level of $1.80 with PE multiple of 27.50x and an annual dividend yield of 3.77%. Hence, considering the aforesaid facts and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of A$1.540 per share.

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