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Smile Brands Group (GRIN) $125mm IPO
$17 price range mid-point, scheduled to trade Thursday, May 6 |
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SUMMARY & CONCERNS |
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Largest provider of support services to dental groups in the United States based on number of dental offices |
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However – growth is not convincing |
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2007 |
2008 |
2009 |
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Number of dental offices |
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298 |
295 |
303 |
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Comparable office growth |
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5.4% |
3.2% |
1.3% |
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Rev per dentist per day |
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$3,206 |
$3,404 |
$3,657 |
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Here’s why growth has stalled |
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GRIN has 'cherry picked' its two main markets, Texas and California, which generate about 60% of revenue. GRIN won’t grow much until they enter and become successful in new markets. |
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California is cutting back on dental payments, the state of Washington won a case preventing companies like GRIN from operating in that state. |
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And "The laws of many states also prohibit dental practitioners from paying any portion of fees received for dental services in consideration for the referral of a patient. In addition, many states impose limits on the tasks that may be delegated by dentists to dental assistants." |
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More |
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. Liquidity event for GRIN private equity backers |
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. Grin provides significant cost reduction services to dentists. Largest branded service company in a fragmented market
. But has not demonstrated the ability to grow revenues & profit
. Comparable growth in offices has flatlined, up only 1.3% in 2009 versus 2008 |
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. Shows little quarter-to-quarter revenue growth |
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. At 18 times trailing 12 months earnings, seems priced high for a company which has not demonstrated consistent revenue and profit growth. |
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Quarterly performance |
Dec 08 |
March 09 |
Jan 09 |
Sept 09 |
Dec 09 |
March 10 |
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Revenue ($mm) |
$108 |
$116 |
$115 |
$115 |
$110 |
$118 |
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Gross profit%-dental,field srvs |
16% |
20% |
19% |
19% |
18% |
20% |
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Operating income % |
-15% |
10% |
9% |
9% |
8% |
10% |
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Profit (loss) |
-$15 |
$6 |
$5 |
$3 |
$4 |
$6 |
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Profit (loss) % of revenue |
-14% |
5% |
4% |
3% |
4% |
5% |
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Note: for March 2010 quarter adjusted, eliminating financing write-off of $2.7mm |
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Dec 2008 quarter includes $23mm good will impairment write-off |
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BUSINESS |
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. Largest provider of support services to dental groups in the United States based on number of dental offices. Supports more than 1,100 dentists and hygienists practicing in over 300 offices nationally |
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. Actively manages the supply chain with affiliated dental groups to utilize purchasing volume to obtain favorable pricing on products and services. |
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. Support services may include marketing, staffing, scheduling, and billing, along with access to facilities and equipment. |
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APPARENT GROWTH OPPORTUNITY |
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Not reflected in GRIN’s office growth |
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Dental Practice Management (DPM) |
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. Currently, only a small portion of the dental services in the U.S. are provided by dentists affiliated with DPM support services organizations. |
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GRIN cuts costs
. GRIN believes that the average cost of operating a dental office for a sole practitioner is 10% to 25% higher than that of a typical dental office supported by a DPM support services organization.
. As a result, GRIN believes there are significant growth opportunities for DPM support services organizations. |
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INDUSTRY |
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. The U.S. dental services industry is large, growing and highly fragmented, with 84% of dentists working either as a sole practitioner or in a practice with only one other dentist.
. According to the Centers for Medicare and Medicaid Services, or CMS, dental services expenditures in the U.S. are projected to be $106 billion in 2010 and are expected to reach $161 billion by 2018 |
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. Approximately 30% to 50% of the U.S. adult population does not seek regular dental care. |
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COMPETITION |
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. The dental services industry is large and highly fragmented
. GRIN is aware of at least twenty DPM support services organizations that operate in the U.S. and several of those organizations have DPM support services models similar to ours operating in our markets. Some of these competitors and potential competitors may have financial resources, affiliation models, reputations, or management expertise that provides them competitive advantages against us, which may make it difficult for us to compete against them. |
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EMPLOYEES |
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. As of March 31, 2010, GRIN employed or contracted with 1,862 employees and independent contractors, including 166 dentists (representing 87 full-time and 79 part-time dentists), 9 hygienists, and 114 dental assistants.
. As of March 31, 2010, affiliated dental groups employed or contracted with 585 dentists (representing 455 full-time and 130 part-time dentists), 412 hygienists, and 1,380 dental assistants. |
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STOCHOLDERS |
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Pre-IPO 93% private equity & funds |
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. Includes Freeman Spogli & Co. 73%; California State Teachers’ Retirement System, 9.8%; A.S.F. Co-Investment Partners II, 6.5%; and Gryphon Investors, 6.5%
In 2005, Freeman Spogli acquired a majority share of the company San Francisco-based Gryphon Investors |
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USE OF IPO PROCEEDS |
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$112mm from sale of 17mm shares |
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Repay preferred stock & debt |
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Smile Brands Group (GRIN) |
GRIN, C+, 6.5 |
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Post-IPO shares: 30mm |
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Dental bus support |
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Santa Ana CA |
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2007 |
2008 |
2009 |
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IPO Mkt |
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Revenue ($mm) |
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$427 |
$445 |
$456 |
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Cap (mm) |
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Gross profit%-dental,field srvs |
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15% |
16% |
19% |
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$332 |
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Operating income % |
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4% |
1% |
9% |
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@$17 |
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Income tax benefit |
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-$3 |
$3 |
$20 |
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Profit (loss) |
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-$8 |
-$12 |
$46 |
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Profit (loss) % of revenue |
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-2% |
-3% |
10% |
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EBITDA |
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$40 |
$44 |
$57 |
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EBITDA % of revenue |
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9% |
10% |
13% |
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Number of dental offices |
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298 |
295 |
303 |
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Comparable office growth |
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5.4% |
3.2% |
1.3% |
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Rev per dentist per day |
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$3,206 |
$3,404 |
$3,657 |
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VALUATION RATIOS |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
% offered |
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trailing 12 months |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
in IPO |
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Smile Brands (GRIN) |
$332 |
0.7 |
18 |
1.6 |
-5.1 |
38% |
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SCORECARD |
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Mgt |
Market |
Market Do- |
Proprie- |
Total |
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1-5, 5 is high |
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Growth |
mination |
tary |
rating |
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20 is perfect |
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2 |
1.5 |
2 |
1 |
7 |
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Quarterly performance |
Dec 08 |
March 09 |
Jan 09 |
Sept 09 |
Dec 09 |
March 10 |
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Revenue ($mm) |
$108 |
$116 |
$115 |
$115 |
$110 |
$118 |
|
Gross profit%-dental,field srvs |
16% |
20% |
19% |
19% |
18% |
20% |
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Operating income % |
-15% |
10% |
9% |
9% |
8% |
10% |
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Profit (loss) |
-$15 |
$6 |
$5 |
$3 |
$4 |
$6 |
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Profit (loss) % of revenue |
-14% |
5% |
4% |
3% |
4% |
5% |
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Note: for March 2010 quarter adjusted, eliminating financing write-off of $2.7mm |
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Dec 2008 quarter includes $23mm good will impairment write-off |
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