The Medibank Private Ltd (ASX: MPL) IPO may have caught most investors' attention today, but another small cap debuting on the ASX gave its shareholders a 45% stag profit.
Shares in Pacific Smiles Group Ltd (ASX: PSQ) were issued in the IPO at just $1.30, but jumped as high as $1.97 at one stage. Shares closed at $1.89, a 45% rise. That thrashed the pants off the 7% gains that Medibank shareholders saw.
But it seems valuations are being thrown out the window with recent IPOs.
At the current price of $1.89, Pacific Smiles is trading on a prospective P/E ratio of 32.3x 2015 earnings, and paying a fully franked dividend of 5 cents, for a yield of around 2.6%.
Medibank is currently trading on a 22.8x prospective 2015 P/E ratio, which appears expensive, given revenue growth is likely capped by regulators imposing limits on premium increases.
Still, Pacific Smiles may be one to watch. The closest comparison company, 1300 Smiles Limited (ASX: ONT), is currently trading on 2015 financial year P/E ratio of 21x. Both companies are aggregators of dental practices, with Pacific Smiles operating 42 dental centres with 250 dentists.
By comparison, 1300 Smiles owns and operates 25 facilities.
But given there are around 8,000 dental practices in Australia, both companies have plenty of room to grow through acquisition. The dental sector is estimated to be worth $8.7 billion, but characterised by small independent clinics and very few large corporate providers.
1300 Smiles has generally paid for its acquisitions through cash, and remains debt free. Pacific Smiles is currently debt free, but says it aims to add 6 to 10 new dental centres each year. The company owns 35 of its own centres, with another seven operated as nib dental centres. Pacific Smiles also has agreements in place with Medibank and NIB Holdings Limited (ASX: NHF) to encourage the insured members to visit Pacific Smiles dental practices.
Give the current valuation of Pacific Smiles, investors may be comparing the company to another very successful aggregator – G8 Holdings Limited (ASX: GEM). If the company can follow successfully in G8's shoes, shareholders may want to hang on.
