Ann: Managing Director's Adddress to AGM , page-3

Yes, i think it's fair to say that 1HFY13 will show big numbers as lots of people eligible under the CDDS rushed to get their treatments in before November 30. 2H13 will probably fall away a bit in the post CDDS environment.

The big thing to look for in the 1HFY13 results in my view is for a "prepaid revenue" liability - this will reflect the success so far of the DMA program (i.e. prepaid revenue for dentist services). Holmes is a pretty measured guy so for him to say things like "it's hard to convey how excited i am about this program", and "explosive growth" tells me it's a potential big deal for ONT. Think about it: we've been told that ONT could accommodate an extra 50% more work & dentists within its existing infrastructure. On top of that, 70% of people don't go to the dentist regularly. If DMA converts even a small portion of those 70% of people who never go to the dentist, into people who go to the dentist once or twice per year for regular check-ups, the surge in revenues could be big, and ONT doesn't require any extra capex to accommodate the potential surge in revenue because they have the 50% capacity in their existing 24 dentistries. Better still, prepaid revenue is fantastic for a business because effectively your customers are funding your working capital cycle. So this is a powerful combination of factors which could seriously impact earnings and cash flow over the next 2-3 years.

The other point is that there is a significant amount of latent earnings power in the balance sheet as it stands. ONT has, in my view, about $10m cash lying around (of the $13m they hold, only $2-3m is necessary for working capital purposes), plus they have precommitments from their banks to double their facility from $7.5m to $15m. So, in total, they have about $18m in "dry powder" for acquisitions or to expand existing practices. Holmes could run out tomorrow and buy a bunch of practices for, say, $15m and pop NPAT by $2m-3m, but he is showing discipline by waiting for the dust to settle post CDDS. In that environment, the hope is that businesses can be bought even cheaper and the "bang for the buck" is larger.

I have absolutely no doubt earnings per share and the intrinsic value of this company will be significantly greater in 3-5 years than it is now. The question is, what sort of return does one require from ONT? At an 18x trailing P/E, the stock is not cheap - it requires a belief that Holmes will continue to execute the company's growth efficiently without a lot of margin for error. Now, personally, i have every confidence Holmes will continue to deliver, but he needs to do so to justify these stock prices.