Words of wisdom: The dental advisor who foresaw Smiles Inclusive's demise pre-IPO
Written on the 12 September 2019 by Matt Ogg
Investors who jumped aboard the Smiles Inclusive (ASX: SIL) IPO in 2018 will regret not having read or heeded the words of Graham Middleton (pictured), a leading dental business advisor with the Synstrat Group.
The fortunes of the Gold Coast-based dental company have collapsed since it listed on the ASX in April 2018 with a listing price of $1 per share to raise $35 million.
As of this morning SIL shares were trading at six cents each and the group's market capitalisation was just $3.2 million.
It now seems prophetic to note Middleton's observations in a March 2018 circular to Australian dental professionals advising them to "avoid this investment", predicting excessive management costs from acquiring so many small dental practices and questioning Smiles' growth forecasts.
At the time, Middleton was sceptical of Smiles' prospectus forecast that it would lift net profit after tax (NPAT) by more than half to $5.8 million while net practice revenue would jump around 15 per cent to $41.4 million.
"These forecast increases in a financial year which is almost over are of a magnitude which stretch our imagination," said Middleton, who has been advising dentists for more than three decades.
"Increases remotely approaching this magnitude simply don't occur in dentistry across a large number of practices in a single year.
"I have never observed net profit growth occurring across a large number of practices of 50.5% in a single year or anything like it; not even in periods of high inflation, and going back some years, when there was a shortage of dentists!"
The industry veteran concluded Smiles' projections were not credible and advised dentists to "steer well clear of this float".
"While it has the support to raise its target capital, being underwritten, and may list at a margin to subscription price; unless it has the systems and management in place to create strong performance, it will in our opinion, languish well behind its major competitors and behind many well run privately owned and conducted dental practices," he said.
He noted that by the prospectus' indications, each practice acquired would have an average revenue of slightly less than $1 million, meaning they would be "quite small by contemporary dental standards".
"This in turn imposes excessive management cost as a significantly greater amount of revenue or significantly fewer practices with the same revenue would be more economical to manage."
In the end, Smiles' net practice revenue in FY18 was 41 per cent below the prospectus forecast at just above $6 million and the business recorded a comprehensive loss of almost $5 million, which is mostly explained by administration and employee costs exceeding revenue.
In its annual report last year the company issued FY19 NPAT guidance of $6 million but the figure actually transpired as a $19 million loss, explained by a massive impairment charge which one joint venture partner alleges is extremely understated.
In a release published yesterday, Middleton said the fact Smiles was dependent on the support of its bankers and its interest bearing liabilities stood at more than $23 million meant it "may be considered to be hanging by a thread".
"Releasing unaudited "preliminary nal report" to the ASX after close of business on the last day of the reporting season for companies having a 30 June balance date does not inspire confidence!" he said.
He explained shareholders now really only had two options - hold on and hope for a recovery or sell out and bear the loss.
"Joint venture dentists face a far more complex problem which at this stage is hypothetical in nature," he said.
"If Smiles Inclusive Limited were to be put into administration which must be regarded as a strong possibility if its bankers decide that there is no hope of recovering their debt it may then be that an administrator would sell the joint venture partners back their Smiles equity in their practices.
"The value may well be regarded as being an impaired value."
Middleton claimed there would now be limited hope of recovery in the overall business and "a quick recovery is most unlikely in this writer's opinion".
"Furthermore, additional capital raisings by the company present huge difficulties," he said.
"Finding another white knight investor willing to put money into the company may be extremely difficult given that recent white knight investors who purchased shares at 14 cents per share now see them valued at 6 cents.
"Furthermore, there is an issue that any purchase of shares representing more than 19.9 per cent of the company would trip into takeover legislation."
Related stories: Smiles partner alleges impairment charges short by $26m
Business News Australia
Author: Matt Ogg