re: Ann: Market presentation - Australian Den... Agree, would be...

re: Ann: Market presentation - Australian Den... Agree, would be nice to know the precise percentage of their revenue that is CDDS generated. It is interesting, though, that they didn't mark the announcement as price-sensitive. If they were anticipating a 20% drop off in revenue as per the typical practice, you'd think they'd flag that as market sensitive. Perhaps the fact they don't provide profit guidance means they aren't required to provide an estimate of the impact of the CDDS shutdown. I suspect we'll get a bit more clarity in the first half results - i suspect these will show a huge lift in revenues as patients rush to complete dental work prior to 30 November, and thereafter the revenues will take a temporary hit.

He's right that a 20% revenue hit is enough to finish a lot of businesses. The good news is that, under the ONT system, a temporary 20% drop in revenue won't crunch their margins too much, because their two major expenses (employee expenses & consumables, which are about 60% of revenues) will drop by a near identical amount under their revenue sharing and buying arrangements. So, if i take last year's result ($35.9m revenue, $16.1m employee expenses, $5.4m consumables and $6m other operating expenses for EBIT of $8.5m, which drops to roughly $6m NPAT ignoring interest revenues) and chop revenues by 20%, i'd expect $29m revenue, $12.9m employee expenses, $4.3m consumables and $6m other operating expenses for EBIT of $5.8m, which drops to $4.1m NPAT pre interest revenue. So on my back-of-the-envelope calcs, a 20% revenue chop equates to a roughly 30% fall in NPAT, which is a harsh short term hit to take. The good news is that, even under these adverse assumptions (which ignore any potentially offsetting factors, i.e. growth since introduction of DMA partnerships or ability to attract new dentists to idle chairs), a $4.1m NPAT on FY12 net operating assets of $25m is still a pretty decent 16% return.

That aside, this announcement was the best thing they've written in quite some time. It is a thorough description of the business model, the competitive landscape, the discipline shown toward acquisitions, and the likely future. I'm hugely encouraged by the ingenuity shown by Holmes in what is a pretty staid industry - their revenue sharing models are certainly more robust than those of competitors, and the DMA partnership sounds very promising and will smooth out revenues going forward. It's important that they've got an equity stake in this business as, provided it is successful, competitors will no doubt want to use it, so licencing out the technology could be a valuable future source of revenue to ONT. The potential for other dentists to wipe out post CDDS is great for ONT, too - they can either acquire good practices on the cheap, or get dentists to move into their empty chairs (ONT have said in the past that their existing practice infrastructure could accommodate 50% more work than currently, i.e. they have lots of idle capacity for new dentists to join).

I've got no doubt this business will be substantially more valuable in 5 years time than it is today, but under current circumstances i'm not sure whether i'd be buying it at $5.60. I'm definitely not selling, either.