Smiles Inclusive Limited

Business News Australia reports that Dr John Camacho of Perth and Dr Arthur Walsh of Brisbane whose practices are owned in joint venture partnerships with Smiles Inclusive have been outspoken against Smiles Inclusive’s management.  According to Business News, Dr Walsh has alleged that Smiles is still losing $600K per month, every month – he has said that:-

“Furthermore, it is no coincidence these disastrous results were released on a Friday evening after everybody had gone home”.

Dr Camacho has raised questions as to why Smiles accounts were not audited on time and whether they could be worse still once subjected to independent scrutiny.

“As dentists inside the business, we and other Smiles dentists see the truth.  There is no substance or credible merit to the infamous turnaround plan whatever the latest version of its plan we are on” he says.

Smiles shares have recently traded at 6 cents per share at which price its market value is $3.21 million!

We not that in its “preliminary final report” to the ASX, Smiles included four reasons for its poor performance being:-

• “Unsuccessful integration of the business and associated ongoing business approach”.
• “Breakdown of relationships with some joint venture partners (JVP’s), which led to a low level of engagement”.
• “Operational issues with the mobile division leading to its temporary closure”.
• “Litigation issues which have distracted management from the operations of the business and resulted in significant legal costs”.

Synstrat’s Observations

On present indications Smiles, for which investors subscribed $1 per share at IPO and have recently traded at 6 cents per share, is struggling to survive.  It is dependent upon the support of its bankers and its stated interest bearing liabilities are $23.413 million.  It may be considered to be hanging by a thread.

Releasing unaudited “preliminary final report” to the ASX after close of business on the last day of the reporting season for companies having a 30 June balance date does not inspire confidence!

Understandably shareholders will be faced with a choice of:-

1. “Holding onto their shares and hoping for a recovery”.
2. Selling out at a very low price and crystallising a loss which may be useful to some, who might be able to offset it against another capital gain.  However, shareholders contemplating this choice should take advice from their accountants and financial advisors.

Joint venture dentists face a far more complex problem which at this stage is hypothetical in nature.

If Smiles Inclusive Limited were to be put into administration which must be regarded as a strong possibility if its bankers decide that there is no hope of recovering their debt it may then be that an administrator would sell the joint venture partners back their Smiles equity in their practices.  The value may well be regarded as being an impaired value.

Again, in this hypothetical scenario those practices purchased outright by Smiles would likely be put up for sale by an administrator and the most likely buyers, and indeed the buyers enjoying relationships with patients would be the dentists’ current working in those practices.

However, there may be a limited hope of a recovery in the overall business but a quick recovery is most unlikely in this writer’s opinion.  Indeed the collapse in Smiles share price is indicative of the stock market regarding recovery as being unlikely.

Furthermore, additional capital raisings by the company present huge difficulties.  Finding another white knight investor willing to put money into the company may be extremely difficult given that recent white knight investors who purchased shares at 14 cents per share now see them valued at 6 cents.  Furthermore, there is an issue that any purchase of shares representing more than 19.9% of the company would trip into takeover legislation.  ie. Somebody first purchasing shares to that value may be expected to make a takeover bid for the entire company.  However, purchasing a company in such a poor financial situation can pose huge risks for the buyer.

It is doubted that any of the other listed dental companies or public companies hoping to list are going to risk a bid for Smiles Inclusive Limited.  I guess hope springs eternal but the state of the business and the amount of debt held within would seem to make such considerations implausible.

The above is general advice and all shareholders and all joint venture dental practice partners should take their own professional advice.

Best wishes to all Dentists,

GRAHAM MIDDLETON