An investment to make you smile

Looking for a small company, overlooked by many and with bucket loads of potential growth?

1300 Smiles (ASX: ONT) provides the use of dental surgeries and practice management, as well as other services to self-employed dentists. This allows the dentists to focus on their professional area of expertise, and simply pay a fee to 1300 Smiles for the provision of those administrative services. The company also employs its own qualified dentists.

1300 Smiles now owns and operates 25 multi-dentist facilities in Queensland and northern New South Wales. The company is looking to expand its presence throughout Australia either by acquiring existing dental practices or establishing its own new operations and recently acquired a large, long-established dental practice in Adelaide.

Refreshing view

The CEO and Managing Director, Dr Daryl Holmes, owns over two-thirds of the company, and is very shareholder-friendly: “Enhancing and protecting [earnings per share] is our top financial priority….We issue new shares only with great care, and only where we are sure that any expansion of our capital base will in fact deliver benefits on a per-share basis to all shareholders”, he said.

In the 2011 annual report, Dr Holmes discussed “agency risk”, which is the risk that managers of a listed company might operate that company more for their own benefit than for that of shareholders: “I can assure shareholders that we work very hard to ensure that agency risk does not affect your investment in 1300 Smiles”.

Indeed, Dr Holmes’ remuneration closely aligns him with shareholders – his annual salary was just $111,663 in 2013.

Growth to smile about

Dr Holmes recently said “The Queensland government in particular is struggling with the need to make dental care more widely available”, and added, “We believe there is capacity within the private dental sector to satisfy much of the presently unmet demand for dental services”.

The company also aims to drive growth by attracting more dentists to existing facilities, assisting the company’s dentists to increase their turnover and income, managing dental facilities owned by others. It also recently implemented a dental care plan, whereby members receive basic dental services on an annual plan, as well as a 10% discount on more advanced dental services.

There is enormous scope for this company to grow Australia-wide. It appears to have few competitors, and has hit on a winning formula. By setting up dental centres, benefits flow to customers, who have a choice of dentists, and by having a number of dentists in one location makes it a more accessible service.

Benefits also flow to the dentists, who now don’t have to worry about administrative tasks and management of their practices. This leaves them more time to spend treating patients and providing dental services, as well as the ability to increase their income.

The company’s dental plan has only been in place for short time, but already has 4,000 members generating recurring revenues of $1.4 million and an additional $1 million spent on services not covered by the plan. This is only going to grow as the company expands and more members join.

Adding it up

1300 Smiles has no debt, a cash balance of $9.3 million and continuing positive cash flow to allow it expand either through new operations or acquisitions. It is reluctant to take on loads of debt to expand, and has shown it cares about not diluting shareholders with very few issues of new shares.

Return on equity is substantial at over 20%, and profit margins have been consistently high.

While the 2013 financial results may look disappointing, the dental industry experienced substantial upheaval during the year, when the federal government cancelled the Chronic Disease Dental Scheme (CDDS). That resulted in a period of frenzied activity, followed by a considerable slowdown in the middle of the year and low earnings growth, but patients are slowly returning.

Perhaps the biggest risks are that the company tries to increase fees too quickly or too steeply, or that dentists leave and start their own practices, in competition with 1300 Smiles practices. (Dentists are usually required to stay on for a number of years as part of the Dental Service Agreement they sign with 1300 Smiles, which partly mitigates the risk.)

Foolish takeaway

The new dental plan, a positive outlook for acquisitions and the ability of the company to expand revenues by 50% without making any significant capital expenditure, bode well for future growth.

If you are looking for a small company, overlooked by many and with bucket loads of potential growth, 1300 Smiles could be the stock to put a smile on your dial.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »