“I am extremely pleased to deliver…” opened the 1300 Smiles Limited (ASX: ONT) annual report for the 2016 full year, which was released to the market today. Although revenues were flat and there was a concerning drop in Over The Counter (“OTC”; more on this later) revenues, increased efficiency lead to wider profit margins and a hefty boost to profit.

The market certainly took the results in its stride, with the share price virtually unchanged at $7.00.

Here’s what you need to know:

  • Revenues were unchanged at $36.4 million
  • OTC Revenues* fell 3.9% to $51.1 million
  • Net Profit After Tax rose 16% to $7.6 million
  • Earnings Per Share rose 16% to 32.2 cents
  • Dividends per share rose 17% to 22.5 cents
  • Profit margins widened from 12% to 15%
  • $7.5 million cash at bank, no debt
  • No forecast, but growth expected to resume in 2017

*OTC Revenues refers to the total fees paid by customers, whereas Revenues excludes the part of the fee that is kept by self-employed dentists

So What?

The drop in Over The Counter revenues was a little concerning and management didn’t explain it in depth, only alluding to turbulent market conditions as a result of politics, private health insurers and private equity firms. A widening of profit margins was impressive given the lacklustre revenue results, and appears to be due to cutting costs and lifting productivity. There should be further gains in this area next year thanks to the recent digitisation and automation of the company’s management software. Note that cost cutting won’t drive profits forever – there’s only so much that can be automated in a people-centric and hands-on business like dentistry.

1300 Smiles’ approach to affordability should stand it in good stead over time and it’s encouraging that management – usually not given to exaggeration – was able to see growth commencing again soon.

Now What?

Thanks to management’s foresight and patience, 1300 Smiles is able to grow organically through adding dentists and initiatives like its Dental Vouchers, as well as acquisitively by buying new practices. Certainly, the group can make an effective pitch for new business thanks to the dentistry experience of CEO Darryl Homes and the intrinsic appeal (to would-be 1300 Smiles dentists) of outsourcing practice management duties.

The company’s growth over the past few years has been highly respectable and there’s room for further expansion over time, although 1300 Smiles isn’t as aggressive as some other businesses like G8 Education Ltd (ASX: GEM) in this respect. Additionally, the group has successfully overcome regulatory hurdles in the past when the Chronic Disease Dental Scheme was removed – resulting in lower sales in that year.

Investors also might want to keep an eye on another dental clinic roll-up firm – Pacific Smiles Group Ltd (ASX: PSQ) – and its results when the company reports on August 18.

Further regulatory hurdles will no doubt materialise in the future, although management also noted that they expect current market conditions to lead to significant opportunities. One key thing investors should do is make sure they don’t overpay for the company, although today’s prices appear fair for those with a long-term timeframe.

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Motley Fool contributor Sean O'Neill owns shares of G8 Education Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.