Small Caps | Mar 14 2019
Dental chain 1300SMILES has become more upbeat, expecting the typical surge in economic activity in North Queensland in the wake of the floods will boost its business.
-Activity could also be augmented by a recovery in central Queensland
-Small benefit from recent initiatives by Medibank Private
-Flexible payment strategies underpinning demand
By Eva Brocklehurst
Brokers are pleased that dental chain, 1300SMILES ((ONT)), has escaped the flooding in North Queensland with only minor interruptions to its business in the major centre, Townsville.
Moreover, the company has become more upbeat, indicating that a surge in economic activity has often been the case following such events, as the area is rebuilt and refurbished, and this should provide a boost to second half earnings and into FY20.
All seven of the company's centres in Townsville (there are 11 in North Qld) were affected to some degree by the flooding, although none were damaged by rising water or mud. No expensive equipment was damaged and insurance is covering any interruption and repairs.
Furthermore, Baillieu notes this activity could also be augmented by a nascent recovery in central Queensland. Wilsons, too, expects the focus to remain on regional Queensland amid a pick up in activity in the resources industry.
Baillieu retains a Buy rating with a target of $7.55, which it believes is supported by the company's track record of growth in earnings, at a 13-year compound rate of 10%, as well as the maintenance of progressive dividends.
Despite there being no acquisitions in the first half, current activity in this regard is described as "intense" and the company has flagged a significant announcement is imminent. To this end, Baillieu describes debt levels as modest.
Morgans considers the business is tracking well and in line to achieve its forecasts, recently upgrading to Add from Hold because of share price weakness. Morgans has a price target of $6.85.
The broker considers 1300SMILES the best operator within the listed segment, although opportunities for growth have, historically, been hard to find. The company has embarked on a new greenfield development. This development, in Morayfield southern Queensland, is co-located with a GP super clinic and several similar projects are under consideration, Wilsons points out.
Morgans assesses competitive pricing pressures in a low-growth environment are holding back the business in the short to medium term, but the stock is trading well below historical averages on a PE basis.
Wilsons has a Hold rating and $6.15 target and likes the stock as an investment. Should consolidation on a national level ramp up, 1300SMILES will have a strong part to play, in the broker's view.
Practices which were acquired in FY18 have performed well and there has been a small benefit from the recent initiatives by insurer Medibank Private ((MPL)) in promoting preventative dentistry. Flexible payment strategies are also seen underpinning demand. Wilsons models modest mid-to-high single digit growth in earnings per share in its forecasts, and while these contain little formal M&A activity, this should provide upside potential.
1300SMILES is primarily located across Queensland, with 27 dental centres. There are four in NSW and one in South Australia.
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