COMMENT by Jenny Ruth
Abano Healthcare continues to do it tough in Australia where, even though it's the second-largest corporate player, it has less than 2 per cent of the market.
Its annual sales across the Tasman haven't grown since 2012 and appear to be getting worse; a 1.6 per cent fall in same-store sales in the nine months ended February turned into a 2.9 per cent decline for the year ended May.
Abano has acknowledged some of that rot is permanent because it wrote off $2.6 million in goodwill relating to four of its 116 Australian practices, an amount partly offset by the write-back of $1.1m in performance-linked deferred payment for recently acquired practices that now won't be payable.
Add to that, after three years, the company is still only about 60 per cent through the process of rebranding its Australian practices under the Maven brand.
In March, Abano announced that it had ceased buying more practices in Australia; its year-end balance sheet suggests that decision was forced on the company. Debt to total assets rose to 40 per cent at May 31 from 31.7 per cent a year earlier, or to $137.7m from $97.3m.
In other words, it ran out of money and its falling share price means it would be difficult to persuade shareholders to give it more capital – its shares fell 8.4 per cent to $4.05 yesterday and are down about 55 per cent from a year ago.
The company in March raised the possibility that it might become a takeover target yet again. Abano has successfully fended off five takeover attempts since 2007 but that was at times when it could point to levels of financial performance making its value superior to what bidders were prepared to pay.
It's very clear any takeover offer now would catch Abano in a weakened state.
It's just as obvious the company should be asking itself whether it has a future in Australia and, if so, how that might shape up.
The cash flow statement suggests it might, with a slight improvement, be able to pay down about $20m in debt in the current year, but the company may be running out of time to turn its performance around.
Yesterday it said it had hired Cameron Partners and Rothschild & Co to "provide additional resource and to assist the board" on the various expressions of interest it has received which may offer strategic opportunities and value to shareholders."
It also says there's no certainty that these expressions of interest will turn into anything concrete.
Chief executive Richard Keys points to the wide open opportunity for corporate players in Australia – Bupa, the largest player, only commands about 2 per cent of the market.
He estimates dental sales in Australia are A$10.8 billion compared with NZ$900m in New Zealand.
While Bupa owns the odd practice in New Zealand, Abano is the only serious player on this side of the Tasman and claims about 17 per cent of the market through its Lumino brand.
Keys says the Maven brand gets a higher net promoter score – a measure of how likely your customers are to recommend your service to others – into the late 80s compared with its score for Lumino in the mid-70s.
"From a clinical and patient point of view, we're doing very well in Australia," he says.
As for why the sales decline accelerated in the final quarter, Keys says it was impacted by the Easter and Anzac Day holidays falling so close together this year and by Australia's general election in May.
He says sales since balance date have been better.
Keys also points to the fact that all the other listed corporate dental players in Australia have also suffered in the last little while.
That's true. Smiles Inclusive, which floated on ASX last year, is a basket case, its shares falling from A$1.16 to 12 cents currently. Much of that was for reasons specific to that company.
Pacific Smiles, a company that has been growing by opening new greenfields practices rather than the roll-up strategy Abano has been using, has seen its share price fall 15 per cent in the past 12 months and Queensland-based 1300 Smiles' shares are down about 6 per cent.
Worse to come?
Craigs Investment Partners analyst Stephen Ridgewell isn't ready to believe Abano's sales have bottomed out in Australia.
"I do not have confidence that bottom has been reached in Australia at a practice level, given same-store sales continued to deteriorate over the course of the year, but they do have other levers to pull, particularly cost cutting, to achieve their target of growing overall earnings in full-year 2020," Ridgewell says.
Abano said ceasing to buy practices in Australia should mean annualised savings of about $1.8m in direct and indirect acquisition costs.
When your annual net profit was as skinny as $7.6m for the year ended May, down 26 per cent from the previous year, it looks like it would be difficult not to report an improved result for the current year.
Support office costs in both countries grew at double-digit rates, up 13 per cent for Lumino and up 11 per cent for Maven and totalling $23.7m, so you'd hope there could be some fat to trim.
Asset sales loom
Ridgewell agrees that one option Abano will probably be considering is the divestment of some or all of its Australian dental assets.
But Australia wasn't the most disappointing aspect of the latest results. The Lumino chain's earnings before interest, tax, depreciation and amortisation margin was squeezed down to 11.5 per cent from 13.9 per cent the previous year with underlying ebitda falling 12 per cent to $16.9m.
Abano says that reflects "significant" investment in IT, people and systems and that it expects margins to bounce back in the current year.
Australian margins are leaner, falling slightly to 10.9 per cent from 11.1 per cent in the latest year.