Pacific Smiles Group Limited

Underlying EBITDA for FY19 Improved by 6%:Pacific Smiles Group Limited (ASX: PSQ) is involved in operating dental centres and provides clinical treatments and service to patients.

FY19 Key Highlights for the period ended June 30, 2019:Patient fees across the Pacific Smiles dental centre network increased by 13.9% to $187.4 Mn. Same centre Patient Fees grew by 350 basis points to 8.6%. Underlying EBITDA for the period increased by 6% to $22.8 Mn. Full-year underlying NPAT decreased by 3.5% to $8.9 Mn. Underlying Earnings Per Share for the period was reported at 5.8 cents, a decrease of 4.9% on the previous year. The Board of Directors declared a fully franked final dividend of 3.5 cents per share, taking the full-year dividend to 5.8 cents per share, as compared to 6.1 cents per share in the prior year. Under operational highlights, the company has added 10 new centres, growing the network of dental centres to a total of 89.


FY19 Performance Highlights (Source: Company Reports)
FY20 Guidance:The company has revised its underlying EBITDA growth guidance from 6% - 12% Y-o-Y to 8% -14%, excluding the estimated impact of $500,000 due to network outage.It has kept its new dental centre openings unchanged at 7-10 for the financial year 2020, where 4 new centres are expected to open in the first half and further 3 in H2FY20. FY20 dividend payout ratio is expected to be in the range of 70-100% of NPAT. 
 
Valuation Methodology 1: EV/Sales Multiple Approach

EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Valuation Methodology 2: EV/EBITDA Multiple Approach

EV/EBITDA Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Stock Recommendation:PSQ’s share generated a positive YTD return of 42.08%. Its gross margin, EBITDA margin and net margin for FY19 stood at 82.6%, 18.8% and 7% better than the industry median of 37.2%, 15.3% and 3.6%, respectively, implying decent fundamental of the company. ROE for FY19 stood at 20.7%, better than the industry median of 11.7%. The stock as on 22 November 2019 made its new 52-week high of $1.895 and closed at $1.840. We have valued the stock based on two relative valuation methods, i.e., EV/Sales and EV/EBITDA multiples, and we are of the view that the stock is overvalued at the current juncture. Hence, considering the aforesaid facts and current trading levels, we recommend a “Sell” rating on the stock at the current market price of $1.840, down 0.541% on November 22, 2019.

Smiles Inclusive Limited

SIL’s Shares Tumbled ~16% on November 22, 2019:Smiles Inclusive Limited (ASX: SIL) owns 56 dental practices operating from 82 sites throughout Australia, acquired between April 2018 and December 2018. Recently, R&J Superannuation Fund became a substantial holder in the company with a stake of 5.24%, effective from October 26, 2019.

Key Highlights of September’19 Quarter:Cash inflows from Q1FY20 operating activities were reported at $12.275 Mn, in-line with the previous quarter but slightly better than the previous corresponding period.Cash outflow from operating activities, excluding non-underlying costs of $0.214 Mn, was reported at $12.963 Mn, an increase of $0.179 Mn than the previous quarter due to the timing of payments for key suppliers. Non-underlying costs, including redundancies, legal costs and professional fees associated with the turnaround strategy were reported at $0.214 Mn. Cash outflows from operating activities, excluding non-underlying costs, improved by $1.642 Mn as compared to the previous corresponding period, driven by reductions in overhead and operating expenses. Net cash outflows for the quarter stood at $1.250 Mn, with cash at bank of $0.345 Mn as on September 30, 2019.


September’19 Quarter Operating Cash Flow Statement (Source: Company Reports)
 
FY19 Key Financial Highlights for the period ended June 30, 2019:Statutory loss after tax for the period was reported at $31.0 Mn. Underlying loss after tax for the period was reported at $4.3 Mn. Practice revenue, net of direct costs, for the period was reported at $30.4 Mn. Some of the factors defining the performance in FY19 included unsuccessful integration of the business and associated ongoing business approach; a breakdown of relationships with some Joint Venture Partners (JVP’s), which led to a low level of engagement; operational issues within the mobile division, etc.

The company has taken various initiatives in Q4 2019 to commence turnaround. It is now engaging in cost savings associated with support office staff reductions.It is bringing forward the improvement strategies for unprofitable businesses and has also undertaken a review of the marketing strategy, performance management requirements and suitable service providers. By the end of the quarter, the management team was entirely refreshed to begin with the development of the turnaround plan.

Stock Recommendation:SIL’s share generated a negative YTD return of 88.54%. Its gross margin for FY19 stood at 80.5%, better than the industry median of 37.2%. However, its debt to equity ratio for FY19 stood at 7.01x, higher than the industry median of 0.27x. The stock made a new 52 week low of $0.029 as on 22 November 2019 and managed to close the trading session at $0.031. Hence, considering the subdued FY19 financial results, recent price movement and current trading levels, we have a wait and watch stance on the stock at the current market price of $0.031, down 16.216% on 22 November 2019, on account of subdued FY19 results.

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