An interesting perspective there Kinggee, appreciate your...

An interesting perspective there Kinggee, appreciate your thoughts. I'll add my two cents worth in response to your points:

1. I don't see how ONT's revenue mix between self-employed and employee dentists has changed materially in the last 5 years. A change in the mix between self-employed and employee dentists would show up in the relationship between ONT's statutory/book revenue and over-the-counter (OTC) revenue, both of which they've been reporting for quite a while. When i look at the chart in the most recent annual report comparing OTC and statutory revenue, i see that OTC revenue is consistently about 20% higher than statutory revenue, and while that relationship changes slightly from year to year, it's been broadly consistent for a long time. In any event, it's neither positive nor negative whether ONT's dentists choose to be self-employed or employee dentists.

2. The CDDS was introduced in November 2007 (and finished 3 weeks ago). I've got no doubt it's contributed to higher-than-usual revenue per dentist, but i would be more careful in associating the CDDS with higher-than-normal operating (EBIT) margins. If the CDDS led to a huge boost in EBIT margins, i would expect ONT's EBIT or gross margin to have significantly escalated from FY08-FY12 as compared to FY06-FY07. The reality is much more sanguine: they were operating at a 28% EBIT margin in FY07 (pre CDDS), and they're now at 23%, having consistently operated at 22% - 26% over the last 5 years.

3. Regarding what sort of dentists they use, there's nothing wrong with using itinerant or cheaper dentists. In the same way as the junior staff at a law firm are frequently the most profitable (you pay them $80k per year and they generate 40 billable hours per week at $300 per hour, which is much more profitable than the salaried partner who takes home $800k p.a. and generates 35 billable hours per week at $800 per hour), i imagine junior or less established dentists can be equally or more profitable than senior dentists for the owners of the firm. You could accuse almost any Australian profressional services firm provider of employing junior or migrant staff at lower cost in an effort to boost margins and be accurate - engineering firms, construction firms, doctors etc. have all done this.

4. You make the point that ONT has previously acquired established dentists and then watched the goodwill evaporate once they leave, which is unavoidable in any service / people business. Unlike fixed assets, people can get up and walk out from an employer, and that's the reality of being in the business of a service provider. The point that's more relevant for me is that it's happened to them much less than other aggregators (i.e. Pacific Smiles or Abano), and they've been (seemingly) successful in filling the vacant chairs left behind. Filling those vacant chairs with new graduates, migrants or other cheaper dentists (at low recruitment costs), then working with those dentists to build up a client base (i.e. goodwill value) over time seems a much more intelligent strategy to me than rushing out and buying an established dentist at a large upfront cost, which is the mistake other aggregators have consistently made.

5. You're right, we will just have to 'wait and see' what the impact of the DMA plan will have. The point for me is that management are usually pretty honest in telling shareholders how things are, whether they be good or bad (they've certainly made no attempt to talk down how big the end of the CDDS might be for the broader industry), so i'm prepared to give Holmes the benefit of the doubt at this stage.

Anyway, i guess we'll find out soon enough. The first half update early next year will be interesting as they will have had 2-3 months of operations without CDDS.

Cheers