No Images? Click here March 2018 Smiles Inclusive Ltd (Smiles Inc) prospectus forecasts stretch the imagination AVOID THIS INVESTMENT Smiles Inc, founded by Mike Timoney is seeking to raise $35 million from an Initial Public Offering via stockbroker, Morgans, as per prospectus which is currently on its website at www.smilesinc.com.au. Smiles Inc is listing with the intention of buying 52 dental practices having $51.948 million of revenue in those practices. As the practices had revenue of slightly less than $1 million each in financial year 2017, it’s clear that many of the practices in this roll up are quite small by contemporary dental standards. This in turn imposes excessive management cost as a significantly greater amount of revenue or significantly fewer practices with the same revenue would be more economical to manage. We note that Smiles “expects” to have acquired 52 practices. It is not clear that contracts bind the owners of those practices to sell to Smiles or its subsidiary at the conclusion of this capital raising, albeit that the company or subsidiary has entered into agreements to acquire them. Confirmation of the status of the contracts would assist. Bizarre financial forecast The pro forma financials at page 33 of the prospectus contain forecasts which stretch credibility. They forecast that:- * Gross Practice Revenue will increase from $51.948 million to $57.641 million in the 2018 financial year. * Net practice revenue (of the 52 practices) will increase from $35.988 million in financial year 2017 to $41.362 million in financial year 2018 an increase of 14.9% in one financial year, and * Net profit after tax (NPAT) will increase from $3.874 million in financial year 2017 to $5.832 million, an increase of 50.5% in financial year 2018! These forecast increases in a financial year which is almost over are of a magnitude which stretch our imagination. Increases remotely approaching this magnitude simply don’t occur in dentistry across a large number of practices in a single year. By comparison, the long established 1300 Smiles Ltd most recent half year report showed an increase in net profit after tax of 4.0% compared to its previous corresponding period! We would suggest that dentists dial up 1300 Smiles Ltd half yearly and yearly financials and also dial up the half yearly and yearly financials for Pacific Smiles Ltd, both well established dental corporates listed on the ASX. Whilst we don’t advocate investment in those companies, we do point out that both are run by respected dentists who had a significant dental management structure with practices under management long before they listed on the stock market. We, Synstrat Accounting Pty Ltd and Synstrat Management Pty Ltd have been advising dentists for 24 years and I personally have been advising them for 31 years. I have never observed net profit growth occurring across a large number of practices of 50.5% in a single year nor anything like it; not even in periods of high inflation, and going back some years, when there was a shortage of dentists! Across Australia, if publicly available data is accepted as being reasonably accurate, growth in dental fees is about 3% per year, possibly a little more. The catalyst for this has been the widely publicised surplus of dentists searching for more work. However a multitude of dental practices have a spare chair or several days of a chair spare per week. While it is possible that the 52 practices being acquired by Smiles Inc may have significant spare capacity, there is no magic wand that will fill that capacity in a short time, or even in a year or two. Certainly there’s not going to be any significant upturn of that magnitude in the 2018 financial year compared to the 2017 financial year because the practice acquisitions can only be completed after the IPO has successfully raised the money and the necessary processes of acquisition have been completed which will be close to the end of financial year 2018. The projection of 50.5% increase in net profit after tax is not credible nor is the 14.9% increase in net practice revenue. Health Fund membership is falling and some estimates are that extras cover may fall by 10% over a year as families hit by the cost of hospital insurance continuing to rise by around double the rate of inflation dispense with extras cover in order to keep their more precious hospital cover. Extras cover is about 52% dental related. We regard this listing as being a far inferior investment to that of 1300 Smiles Ltd and Pacific Smiles Ltd. We do not recommend either of those companies as investments to dentists but we regard their management and systems as being well established and having far more credibility than the management of this new offering which, as far as we can see, is currently managing no dental practices. We are unimpressed by the choice of the name Smiles as it looks like a cheap attempt to capitalise on the work of others. Indeed there is also a proliferation of other dental practices which have worked that word into their title. Overwhelmingly, it is best for privately owned practices to adopt a practice name associated with their location, such as Greensborough Dental or George Street Dental. Reportedly, stockbroker Morgans has locked in sub-underwriting for its underwriting of this float. Avoid this Investment Our advice to dentists is to steer well clear of this float. While it has the support to raise its target capital, being underwritten, and may list at a margin to subscription price; unless it has the systems and management in place to create strong performance, it will in our opinion, languish well behind its major competitors and behind many well run privately owned and conducted dental practices. Risk Dental Corporates appear to have peaked and significant future growth will prove to be challenging. I regard the risk in Smiles Inc as being substantially greater than investing in 1300 Smiles Ltd or Pacific Smiles Ltd, albeit that I regard both those company’s shares as being overpriced. Limitations The great limitations dental corporates have is that no technology exists or is likely to exist which will enable a dentist to treat two patients simultaneously. In other words, it’s limited by the human factor. In this sense, dental corporates and other rollups of health professionals do not have the ability of large companies in other industries of using an aggregation of capital to invest in machines which replace a substantial proportion of human labour. Rio Tinto’s driverless trucks and prospective huge driverless ore trains come to mind. Dental Graduates The smartest dental graduates will continue to seek employment in good privately run practices hoping to work their way into a part or full ownership of a practice where they will enjoy personal control in time. Furthermore, new dental practice start-ups will continue to occur albeit that this can prove to be a rocky path for most in the early years compared to buying an established practice. In the foreseeable future privately owned practices will continue to provide the majority of dental treatment. Mike Timoney We note that after the conversion of convertible notes at what appear to be very favourable terms, Mike Timoney will own 9,677,000 shares in this company out of 57,932,900 shares in total ie, 16.7%. He will have had some expenses associated with his promotional activity with dental practices but this does appear to be a magnificent reward for his efforts. Our advice is to avoid investing in this company. Best wishes to all, Graham Middleton
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