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Should you buy 1300Smiles?

1300Smiles (ASX: ONT) provides dental surgeries, practice management and other administrative services to self-employed dentists. It also provides general dentistry services to patients and owns and operates full-service dental facilities at 24 sites in Queensland.

For over a year the company has had to contend with the closure of a Commonwealth government dental scheme that had grown to provide almost 20% of the revenue collected by all dentists in Australia. At first glance one would assume a serious financial impact for the company.

However, fears were allayed by Managing Director Dr Daryl Holmes at yesterday’s Annual General Meeting. He highlighted that the business operates in a defensive industry and that people will always need assistance with their teeth. This was borne out during the GFC when the company continued to grow.

Other factors underpinning the business are the ongoing increased efficiencies derived from acquired practices and the in-filling of excess surgery capacity, which is achieved by adding dentists. Both of these factors achieve short-term results whereas the acquisition of practices results in medium-term gains.

Recurring income is also on the rise via a Dental Care Plan that covers all preventative dental treatment and a Dental Treatment Plan that allows patients to finance more elaborate procedures. Both of these plans contributed $1.7 million for the year.

1300Smiles is defined as a roll-up. Additional companies of this genre are fellow healthcare companies Primary Healthcare (ASX: PRY) and veterinary services company Greencross (ASX: GXL) as well as the insurance company Austbrokers (ASX: AUB).

Of all the investments in the roll-up space, I have a strong preference for Greencross, for a number of reasons. There is more overhead involved in a veterinary practice (dental equipment is also required on hand) and as a result more synergies to be derived.

Also the diversification, cross-selling opportunities and potential synergies derived from the yet-to-be-approved merger with Mammoth Pet Holdings, makes for a more compelling medium- to long-term investment.

Foolish takeaway

Despite the above assurances from 1300Smiles, revenue growth did in fact slow by 1.3% for the 2012/13 year with turnover heightened in the first half as patients rushed to beat the end of the Commonwealth scheme. I would adopt a wait-and-see approach as additional acquisitions may be required once the short-term synergies have been extracted from past acquisitions.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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