An investment to make you smile

Looking for a small company, overlooked by many and with bucket loads of potential growth?

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1300 Smiles (ASX: ONT) provides the use of dental surgeries and practice management, as well as other services to self-employed dentists. This allows the dentists to focus on their professional area of expertise, and simply pay a fee to 1300 Smiles for the provision of those administrative services. The company also employs its own qualified dentists.

1300 Smiles now owns and operates 25 multi-dentist facilities in Queensland and northern New South Wales. The company is looking to expand its presence throughout Australia either by acquiring existing dental practices or establishing its own new operations and recently acquired a large, long-established dental practice in Adelaide.

Refreshing view

The CEO and Managing Director, Dr Daryl Holmes, owns over two-thirds of the company, and is very shareholder-friendly: "Enhancing and protecting [earnings per share] 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 discussed "agency risk", which is the risk that managers of a listed company might operate that company more for their own benefit than for that of shareholders: "I can assure shareholders that we work very hard to ensure that agency risk does not affect your investment in 1300 Smiles".

Indeed, Dr Holmes' remuneration closely aligns him with shareholders – his annual salary was just $111,663 in 2013.

Growth to smile about

Dr Holmes recently 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 also aims to drive growth by attracting more dentists to existing facilities, assisting the company's dentists to increase their turnover and income, managing dental facilities owned by others. It also recently implemented a dental care plan, whereby members receive basic dental services on an annual plan, as well as a 10% discount on more advanced dental services.

There is enormous scope for this company to grow Australia-wide. It appears to have few competitors, and has hit on a winning formula. By setting up dental centres, benefits flow to customers, who have a choice of dentists, and by having a number of dentists in one location makes it a more accessible service.

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, as well as the ability to increase their income.

The company's dental plan has only been in place for short time, but already has 4,000 members generating recurring revenues of $1.4 million and an additional $1 million spent on services not covered by the plan. This is only going to grow as the company expands and more members join.

Adding it up

1300 Smiles has no debt, a cash balance of $9.3 million and continuing positive cash flow to allow it expand either through new operations or acquisitions. It is reluctant to take on loads of debt to expand, and has shown it cares about not diluting shareholders with very few issues of new shares.

Return on equity is substantial at over 20%, and profit margins have been consistently high.

While the 2013 financial results may look disappointing, the dental industry experienced substantial upheaval during the year, when the federal government cancelled the Chronic Disease Dental Scheme (CDDS). That resulted in a period of frenzied activity, followed by a considerable slowdown in the middle of the year and low earnings growth, but patients are slowly returning.

Perhaps the biggest risks are that the company tries to increase fees too quickly or too steeply, or that dentists leave and start their own practices, in competition with 1300 Smiles practices. (Dentists are usually required to stay on for a number of years as part of the Dental Service Agreement they sign with 1300 Smiles, which partly mitigates the risk.)

Foolish takeaway

The new dental plan, a positive outlook for acquisitions and the ability of the company to expand revenues by 50% without making any significant capital expenditure, bode well for future growth.

If you are looking for a small company, overlooked by many and with bucket loads of potential growth, 1300 Smiles could be the stock to put a smile on your dial.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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