1300 Smiles Limited: A stock to make you smile

1300 Smiles Limited (ASX: ONT) is a stock you may or may not have heard about. The company provides the …

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 17, 2012 4:23 pm AEDT

1300 Smiles Limited (ASX: ONT) is a stock you may or may not have heard about. The company provides the use of dental surgeries, practice management and other services to self-employed dentists who carry on their own dental practices, and keep their own patients. This allows dentists to focus on delivery of dental services, and pay a fee to 1300 Smiles for the provision of administrative services. The company also employs some qualified dentists.

Half Year Results

The company's shares rose 5% on 16^th February 2012, thanks to the company reporting $3.4m in net profit after tax, a 27% increase over the prior corresponding period. Revenues were up 20% to $17.4m. Net profit margin is very healthy at 19.5%, up slightly over FY2011 full year results.

Source: Company Reports

The company has paid dividends totalling over 95 cents a share since listing in 2005, and has declared an interim dividend of 8.6 cents payable on 12^th April 2012.

The company has averaged earnings per share (EPS) growth of over 22% since 2005. For the first half of 2012, EPS increased by only 14.3%, due to an issue of 2.4m new shares. The company stated that this was to "fund growth opportunities, and thereby make returns to shareholders more secure in the long term".

Refreshing View

What is nice to read is the company's commentary around the results. The CEO & Managing Director, Dr Daryl Holmes, owns over 67% of the company, and I like how shareholder-minded he appears:

"Enhancing and protecting EPS is our top financial priority….We issue new shares only with great care, and only where we are sure that any expansion of our capital base will in fact deliver benefits on a per-share basis to all shareholders", he said.

In the 2011 annual report, Dr Holmes discusses "agency risk" – the risk that managers of a listed company might operate that company more for their own benefit than for that of shareholders, and he goes on to state "I can assure shareholders that we work very hard to ensure that agency risk does not affect your investment in 1300 Smiles".

Also in the 2011 annual report, he states that his main financial reward for running this company comes from the dividends he receives from his shareholding and those dividends greatly outweigh his pay and benefits.

Future growth

Dr Holmes said "The Queensland government in particular is struggling with the need to make dental care more widely available", and added "We believe there is capacity within the private dental sector to satisfy much of the presently unmet demand for dental services".

The company now owns and operates twenty-three multi-dentist facilities in Queensland and northern NSW, mainly in the ten major population centres. The company is looking to expand its presence throughout Australia either by acquiring existing dental practices or establishing its own new operations.

The company also aims grow through a number of key drivers:

Attracting more dentists to existing facilities and expand those facilities
Assisting dentists who already practice in the 1300 Smiles system to increase their turnover and income
Managing dental facilities owned by others.

I believe that there is enormous scope for this company to grow Australia-wide. 1300 Smiles appears to have few competitors and appears to have hit on a winning formula.

By setting up dental centres, benefits flow to customers who have a choice of dentists, and having a number of dentists in one location may make it a more accessible service. Ever tried to get in to see a dentist without being told they are fully booked for the next two months?

The company also works with health funds in all of its practices, making services available for health fund members.

Benefits also flow to the dentists, who now don't have to worry about administrative tasks and management of their practices. This leaves them more time to spend treating patients and providing dental services.

Dentists also have the opportunity to interact with other dentists on a daily basis, which they wouldn't have as a single operative practice.

Financials

1300 Smiles has debt of $7.5m, but has a nice cash balance of $13.25m, resulting in net cash in the bank to expand either through new operations or new acquisitions.

The company also generates a substantial return on equity of over 30%, and has very high and consistent profit margins, averaging over 20% since 2002. This will surely attract competitors at some stage.

Risks

The major risks I see are these:

The company trying to increase its margins and pushing its fees up too high, forcing dentists to leave and start their own practices, in competition with 1300 Smiles practices. However, dentists may be required to stay on for a number of years as part of the Dental Service Agreement they sign with 1300 Smiles thereby mitigating some of that risk.
For investors, the shares are very illiquid, so acquiring shares at cheap prices, or a significant number of shares may be difficult and it may be hard to find buyers at reasonable prices when you want you sell.
The market capital of the company is $89m, so it's a very small company, and could be considered risky for that reason.

The Foolish bottom line

If you are looking for a small company, overlooked by many, not covered by any analysts and with loads of potential growth, 1300 Smiles could be the stock to put a smile on your dial.

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Motley Fool contributor Mike King doesn't own shares in 1300 Smiles. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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