Store Rollout Strategy – Pacific Smiles

Pacific Smiles (ASX:PSQ) is one of the top holdings within Glennon Small Companies (ASX:GC1). During the pandemic, the Company successfully proved its resilient business model and financial strength. With the economy now opening up, PSQ has accelerated its rollout strategy to capture further market share.


In this article, we expand further on our investment case for the company.


Attractive business model PSQ’s business model provides great value to dentists.


It operates dental centres for independent dentists to provide clinical treatments to patients. Dentists are provided with fully serviced and equipped facilities, support staff (dental nurses), marketing and administrative services.


In return, the Company takes 60% of the patient fees generated by the dentist.


Working with PSQ allows dentists to devote all work hours to dental services without the distraction of operating a dental centre. PSQ also provides work-life flexibility with fees paid being directly linked to services provided.


PSQ proved the resilience of its business model during the pandemic. From March to May 2020, dental centres were forced to close to prevent spread of COVID.


During this time, PSQ paid nothing to the dentists, which is one of the biggest costs for running a dental centre.


But the Company also incurred all the fixed costs. If a dentist operated their own dental centre, they not only lost their income but would also have needed to handle all the administrative tasks and fixed costs of running a centre. This includes renegotiating rents and applying for JobKeeper to keep on-site staff employed.


We believe the pandemic successfully showcased the value of PSQ’s business model for dentists looking for work-life flexibility and risk-sharing.


Accelerating rollout strategy

PSQ is building new centres with the aim to increase its market share from 2.4% to more than 5%. Historically, PSQ opened 8-12 new centres per year. Every new centre cost $600,000 to open and reaches EBIT breakeven in year 4. After that, it makes around $300,000 in pre-tax earnings.



Given the business’ increasing scale and in light of successfully proving its business model during the pandemic, PSQ now has more firepower to invest in new lossmaking centres. Indeed, PSQ will open 15 new centres in FY21 and has stated its intention to open 20 new centres per annum over the next few years. We now assume PSQ will operate 220 centres by FY25 and see a pathway to $70m in pre-tax earnings on a mature centre basis towards the end of this decade.


Conclusion

PSQ is currently trading on a forward PE multiple of 30x which looks expensive, but that includes the costs of new centres which are lossmaking. With a current enterprise valuation of $400m compared to our long run target of $70m in pre-tax earnings, we see scope for a doubling in the value of the business over a conservative timeframe of 10 years.


Till next week happy investing,


Michael & Kenny

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