9 April 2019

Abano - Maven Forced to Stop Buying Dental Practices

New Zealand Health Group Abano, which owns Australian dental chain “Maven” has had what New Zealand’s Newsroom describes as a painful profit downgrade.  Last week Abano said that net profit would fall by 12.6% amidst “challenging” conditions in Australia.  Abano’s shares promptly fell from $5.75 the day before to $3.86 on the New Zealand stock market.  This is well below its record price of $10.20 in December 2007; its share price having peaked nine months after it rejected a $9.84 per share partial takeover bid.

Craig Investment Partners Analyst, Stephen Ridgewell is quoted as attributing the share price fall to its decision to cease buying practices in Australia.  The architects of the buy out proposal in 2017, Hutson’s and Reeves, who launched their offer in November 2016 had argued that Abano – Maven should stop buying practices altogether as its strategy of building scale by acquisition had been “value destructive for shareholders” and the company was under performing financially.  At that time Abano had 196 practices, 92 of them in Australia.  It now has 239, 116 of them in Australia.

According to Newsroom Abano raised $35 million for a rights issue in 2017 but its gearing is now on the high side at 45.6%.  It may have been forced to stop buying practices because of insufficient capital.  Certainly the fall in the share price will make it expensive and difficult to raise capital via another rights issue and bankers may be wary of lending to it considering that its share price has come down from a 2017 high of $10.20 to the recent price of $3.86.

Abano had spent about $40 million a year on acquisition which in theory should have spread overhead costs over growing number of practices and reduced costs per practice.

Overhead costs have continued to increase whilst same practice sales (fees) in Australia have gone backwards on a compounding basis.

According to the article the latest advice is that same practice sales in Australia in the nine months ending February were down 1.6% which follows falling sales (fees) almost every half year since the first half of 2016 except for the six months ending May 2018 which were flat.  I note that New Zealand has different financial reporting year to Australia.  Across full financial years Abano (including Maven) hasn’t achieved same practice fee growth in Australia since 2012.  Abano is still only 70% through the process of rebranding its Australian practices as Maven.  However, Synstrat’s long experience of advising dentists indicates that dental practice is a client focussed service which is heavily dependant on the quality of dentist to patient relationships rather than branding.  Having to replace large numbers of retiring dentists with often inexperienced and part-time dentists is not a pathway to longterm practice growth.

Mike Timoney who founded Dental Partners in Australia arranged to sell it to Abano and was later sacked by Abano who have since initiated its rebranding as Maven.  He has since started Smiles Inclusive, which after purchasing 52 practices initially, has turned into a disaster zone with its share price tanking from $1.16 to about 18 cents recently and is now engaged in a colourful battle for control.

Best wishes to all dentists,

Graham Middleton

Disclaimer:

The information contained herein is of a general nature and no specific action should be taken without individual advice. Speak with Synstrat staff as appropriate.  Prepared by Synstrat Management Pty Ltd for clients of the Synstrat Group.  Synstrat Management Pty Ltd is the holder of Australian Financial Services Licence No. 227169.  ABN 57 006 295 325