No Images? Click here DENTAL NEWSLETTER March 2018 Smiles Inclusive Ltd (Smiles Inc) – looks High Risk Refer to information at Synstrat’s website Practice Profit Claims Appear Excessive The prospectus seeking investments in this IPO needs close scrutiny. The claims made concerning practice revenue and profit are outside the normal patterns of any significant group of practices; that we have observed; particularly a group of practices with average fees of just under $1 million. As many of the practices are quite small they may be relatively expensive to manage per dollar of fees. Smiles Inc which is purchasing the practices via a subsidiary business “Totally Smiles”, a brand owned by Smiles Inc will enter into practice specific profit sharing arrangements under a joint venture partner program. 52 Practices or Less? Although the prospectus refers to 52 practices it is not clear that the company will be able to complete 52 acquisitions prior to listing! According to the prospectus the volume of acquisitions to be completed in a short time frame means that there could be a delay in completion of a small number of acquisitions as set out under risks in relevant sections of the prospectus. This is followed by the statement that “the Directors are confident that should this occur, the company would either complete the acquisitions following the quotation of its shares or alternatively enter into and complete new acquisitions shortly thereafter”. This statement suggests that not all of the 52 practices referred to are contractually bound to settle! Smiles Inc needs to confirm to potential investors how many binding contractual commitments they have in respect of dental practices in order that potential investors can be confident that they understand the risks involved in investing. Tell the investors and dental practice vendors how many practices are actually bound by contracts and how much the gross fees of these practices actually amounted to in 2017 financial year before this IPO closes, Mr Timoney. Management structures If the contracts of 52 practices are not settled prior to listing and there is not an appropriate management structure in place to deal with issues in each of the practices contracted not only is the achievement of the pro forma forecast in its prospectus unlikely but it will be challenging to meet that forecast in the following year! Dilution Mike Timoney is being allocated 9,659,000 shares, or 16.7% of shares in the company and other persons described as senior management, 2,417,000 shares out of the total of 57,932,900 $1.00 shares and hence there is considerable shareholder dilution of 20.845% at the outset. The enterprise will commence its existence with $36 million of borrowed money within a finance facility and $5.3 million via convertible notes. Our advice to dentists is to avoid this investment. Close reading of the prospectus suggests that the risks may be significantly greater than first supposed. What dental practice owners should do Dental practices should not contemplate joining Smiles Inc as new practice acquisitions until its situation is absolutely clear in respect of its finances, its management services are confirmed as being in place, the number of practice acquisitions which have actually settled are known, and have spoken to practice principals who have sold their practice to Smiles Inc who can speak authoritatively as to how effectively it is operating. They should also verify whether it is meeting its pro forma financial forecasts. This is particularly important if part of the consideration for their joining is in Smiles Inc shares. Without the knowledge of these key issues any practice owner who sells their practice to Smiles Inc may be taking a large risk. Smiles Inclusive Ltd name Smiles needs to confirm that the name Smiles is acceptable to the ASX for listing purposes given that other dental corporates have “Smiles” in their names. Health Fund Demands – dentists repay amounts for alleged overtreatment I note a comment from a dentist who received a demand for the repayment of a substantial five figure sum. The supporting evidence provided to the dentists to substantiate the health fund’s claim was in the dentist’s words, “”Biased, full of errors, omissions and inaccuracies”. The dentist replied in detail and offered an amount of less than 5% in settlement, which the health fund accepted! It doesn’t appear that the fund concerned had much confidence in its own procedures.
Medibank – Half year results not as good as reports indicated Medibank reported an increase in net profit after tax of 5.9% compared to the previous corresponding period and an interim dividend of 5.5 cents per share. Premium revenue grew by only 1.8% but this barely stayed in step with inflation despite much greater premium increases so it was making a bigger profit out of a declining number of policyholders. The number of Medibank policyholders declined by 1.3% with 2.5% of policies lapsing. It partially made up for this by purchasing policy portfolios during the half year but even then the number of policies in force still fell by 0.6%. It is noted that claims expenses were: Hospital cover $1,993.3 million Extras cover $631.3 million 52% of extras payments were dental related and 21% optical. It continues to hide the detail concerning payout ratios for extras cover compared to hospital cover but given the overall marginal expense ratio and what is generally known it is clear that gross profit percentage for extras cover is much greater per dollar than for hospital cover. The half yearly report is loaded with PR fluff, but the reality is that Medibank is operating in a market where health insurance coverage is falling as premium increases remain well above wages income growth. Policy lapses are expected to continue to exceed new policies initiated. It’s a picture of a business in danger of a steady decline. NIB Half Year Result Looked at closely NIB’s result was ordinary with group net profit after tax dipping 1% to $70.9 million. CEO Mark Fitzgibbon said:- “The domestic Australian health insurance market is as soft as I can recall. Household incomes aren’t growing and there’s no shortage of competition in the market,” he said. NIB Hospital claims paid out increased by 6.5% over the previous corresponding period compared to an increase of 4.3% in ancillary costs. NIB’s market equalisation levy rose by 13.9%. It’s not commonly realised but health funds are required to cross subsidise each other’s hospital cover on the basis of the more efficient hospital cover providers having cross subsidised the lesser. Not surprisingly they concentrate on trying to sign up extras (ancillary) Policyholders where they make a bigger profit margin and don’t have to cross subsidise other funds. Except for of course Bupa where Australian profits cross subsidise patients in the UK! Dentists Buying Into Their Boss's Practice Dentists buying into their boss’s practice sometimes ask whether they should get a reduction in the value of practice goodwill because they have been treating patients. But if your boss paid you the agreed salary or contract fee you are not owed a special deal. We add that it’s a mistake for the owner to expect a good employee dentist who is a natural practice builder to pay an amount significantly in excess of true practice proprietorship value. When that happens trust breaks down. The practice builder leaves and the practice is damaged. We observe that when an offer to buy into a practice is made and rejected, the employed dentist usually moves on. The lesson for dentists making the offer to buy in is to think carefully before raising the subject and it’s advisable for them to have their practice valued to remove any doubts as to fairness. This is particularly so when the vendor and buyer are to become long term associates and it’s vital that a good relationship exists in the future. Practice Accounting & Valuation Services Synstrat is the only accounting group in Australia which maintains an active, continuously updating database of dental practice benchmarking performance. This is essential in assessing and advising performance of a practice and in valuing practices. Telephone David Collins or Graham Middleton on 03 9843 7777. Bad decisions not to buy out associates When the owner of a dental associateship wishes to sell, it is normal for them to offer to sell to a continuing associate in the practice and indeed many agreements between associates make this mandatory. Even when there is no such agreement, practicality points to necessity of the vendor offering to sell to the remaining associate(s). Continuing associates must consider such acquisitions because if they don’t and an unknown dentist buys in, they run the serious risk of having a non-compatible dentist as an associate and this can have a seriously detrimental impact on both the internal functioning of a practice and on its external reputation. Often the best solution is to buy out the associate, employ a dentist and when you are satisfied with compatibility, on-sell part of the practice to that individual. Labor's proposed dividend imputation changes These will mainly hurt lower income retirees who own Commonwealth Bank, Telstra, Woolworths or AMP shares arising out of offers of long ago, whose imputation credits will effectively be confiscated. Superannuation funds will be able to restructure investments to reduce or eliminate the impact. Labor’s estimate of $59 billion of revenue to be saved over 10 years is wishful thinking. Very little saving will occur and most of it will be at the expense of low income retirees. Best wishes to Dentists, Graham Middleton The Synstrat Group are Australia's most experienced Dental practice business advisers, accountants, practice valuers and licensed financial advisers. 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