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$7.68 1300 smiles limited

To clarify my position I understand totally the use of company...

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kinggee

52 Posts.

1

24/02/15

23:32

Post #: 14812391
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Originally posted by madamswer ↑

kingee,

Thank you kindly for posting a less-than-ebullient view of the business.

I always prefer it when I come across investment views that are diametrically opposed to my own, because they might reveal some shortcomings in my own analysis and prevent me from making mistakes and destroying the value of my capital.

A dangerous thing, I think, is to only be open to opinions and views that reinforce one's own.

I would, however, like to provide a risposte to some of the misapprehensions under which you may be labouring:

"This representation of the company and board is so over the top that someone could be forgiven for believing it was written by Darryl himself!"

Yeah, I guess it was a bit emphatic.

It's just that I cannot but find the notion of a CEO earning just a little above the median national wage to be a highly fascinating one.

Presumably you find it perfectly rational and reasonably common?

"Purchase of the Brisbane Dental Group- Capital out for Earnings in."

Yes, “Capital out for Earnings In” is a reasonably common and fundamental tenet of the capitalist system. Companies build things or they buy things to expand the value of their enterprises and thereby (potentially) increase in intrinsic value.

But the important thing is how well they do this. You haven't expressed any opinion on this, so I'll provide you with some facts to help better inform the debate:

The notes to the accounts (Note 31, to be precise) show that the company's Pre-Tax Profit in FY13 would have been $2.17m lower in FY14 had the acquisitions not occurred. Applying a 30% tax rate to this figure gives $1.52m Net Profit.

That throws up a 7.0x P/E acquisition multiple, before any synergies.

My pretty rudimentary grasp of financial arithmetic tells me that if the company's management keep rolling up dental practices at this sort of acquisition multiple, the per share earnings accretion will be substantial.

"They are still heavily dependant (sic) for profits on a Government funded scheme to prop up the profits of the practices..."

Yes, your point is well-made and one of which investors need to be cognisant.

But that's invariably what one gets investing in healthcare stocks given governments (state and/or federal) are the ultimate payer. Witness pathology, radiology, GP medical centres, private hospitals, and aged care. Even private medical insurance businesses have the pricing of their products ultimately determined by government policy.

"The question for the punters is: What is a company worth that's profitability is dependant (sic) on Government Dental Funding? "

Refer above to comments about government funding for broad sectors of the healthcare sectors.

The question for you is: what is the market saying the worth is of other companies whose profitability is dependent on Government Funding?

"This, I suspect is why they have approx. 2 million dollars in trade receivables which is not impaired. I suspect a large portion of this is owed by Medicare. They are slow to pay but they do pay."

$2m in Trade Receivables in the context of some $36m in annual revenues is not only reasonable, but as a proportion, it is in the lowest decile of the 1oo-odd companies I actively research.

Moreover, Net Receipts reconciles almost 100% with EBITDA (ten year average is 99%), suggesting that there is nothing untoward about ONT's receivables collection performance.

Somewhat contrary to your ambit suspicions.

"CEO makes his money by using the companies assets to pay out dividends."

Er...yes, indeed he does.

Actually, as it happens, he also pays me - and other shareholders just like me - dividends out of the assets.

(And that's the way I prefer it. I tend to like it when management's fortunes are tied in with those of shareholders. Keeps the executive mind focussed, I say, and less liable to do strategically dumb things that will adversely affect dividend growth.)

Are you telling me that you would prefer it if you, as a shareholder only shared in the profits with other shareholders if your company's management paid themselves a larger - rather than a smaller - salaries, and thereby leaving less to go around in the form of a dividend?

Surely not?

I dunno, maybe I'm slightly crazy, but as an investor, I tend to prefer more return on my investment, as opposed to less.

You, not?

PS . Paying dividends by "using (a) company's assets" is actually not only quite common practice, you'll find, but it is tactually he raison détre of The For-Profit Enterprise

"The 10 million dollars capital given to BDO will come back as EBIT and a significant portion will then go into the CEO's pocket as dividends! "

Again, yes indeed, I expect it certainly will.

But not just the CEO's pocket; my pocket, too, as well as those of other shareholders.

To boot, because of the accretive nature that the EBIT was "acquired", the quantum of those dividends will be higher than otherwise would have been the case had the acquisition(s) not occurred.

"My guess is the CEO will sell shares in the near future!"

Interesting assertion.

My guess is that he won't.

The basis of my "guess" is as follows:

D.Holmes shareholdings:
2011: 14,711,729
2012: 14,711,729
2013: 14,711,729
2014: 14,711,729

Care to share the basis for your "guess"?

Expand

To clarify my position I understand totally the use of company capital to generate profit. I also understand the fact that if the CEO gets dividends then so do the shareholders. But if the business model is largely just turning the capital into EBIT and the capital itself is not secure then the deal for the guy who is paying $6+ for a share is a DOG! I think this is reflected in the Net Tangible Asset/Share?
In my previous posts I have stated my problem with the business model is that I don't believe the returns are sustainable. The dentists in these large profitable practices sell because of a tax loop whole. Effectively they get there next 5 years profit up front as capital gain with all the associated small business concessions. In return they work for 5 years and return this capital as EBIT to 1300 smiles. A win- win up to this point. However being business savy they leave either to retire or to run their own businesses again without giving the approx. 20% margin to 1300 smiles. 1300smiles has managed to sustain profitability in most of these practices by using the government dental schemes while they are available. I suspect 1300's profit GROWTH substantially comes from another acquisition. In my opinion the capital has simply been transferred to EBIT and they are left with a practice that is worth very little without the personalities. My question is about sustainability. 10 years is a very short timeframe really. Especially when 4?(I think) of them were CDDS years. Remember even with the 10 million dollar acquisition and 30% profit growth profit is still not back to what it was a couple of years ago.
The basis for my guess is simply if something is overvalued and the profits may not be sustainable then it would be a good idea to sell at least some of it! Alternatively you could do another capital raising and try for another 10 million to turn into EBIT and then Dividends. If a 10 million dollar acquisition can produce 10 million in EBIT over 5 years that equates to at least 2million fully franked dollars in the largest shareholders pocket even if the purchase is worth nothing at the end of 5 years!

ONT Price at posting: $6.60 Sentiment: Sell Disclosure: Not Held
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