The Motley Fool

Did 1300 Smiles Limited put a smile on your dial today?

Motley Fool investment research analyst Claude Walker and I once had a friendly debate over the potential of 1300 Smiles Limited (ASX: ONT).

Claude felt that the company oozed growth potential and with quality management, was an outstanding past and future success story.

I thought that improving dental hygiene and diet practices among the population would lead to a long term decline in demand for dental services, meaning that 1300 Smiles would be buying larger slices of a shrinking pie.

It’s become apparent that my earlier view was not quite correct, for a couple of reasons.

Firstly, I’d underestimated management’s ability to draw in new clients, which it is doing quite effectively with its $1 a day dental plans.

Secondly, even though actual need for dental services (i.e. cavity filling, etc) may decline over time, as consumers become more health conscious it is likely that demand for dental services (6-monthly check-ups, cosmetic work, etc) will increase.

Simple arithmetic suggests it’s fairly likely that if every person in the country had two check-ups a year, demand for services would grow faster than the reduction in treatments would reduce it. After all, how many times a year do you get cavities filled?

You can see Claude’s overview of the company’s rise in his article here.

Managing Director Dr Daryl Holmes was obviously thinking along the same lines as Claude when he told the market today, ‘From where I sit, the ten years ahead of us are at least as promising as the last ten years.’

2015 will surely be one of the best years on record to date, with 1300 Smiles turning in a stellar set of results this morning:

  • Revenue up 19% to $17.6 million
  • Net profit after tax up 33.6% to $3.4 million
  • Interim dividend increased 38.5% to 9 cents per share (fully franked)

Despite the removal of the Gillard Government’s Chronic Disease Dental Scheme which impacted revenue last year, the first half results for 2015 are as good as any prior first half, while the dividend of 9 cents per share is the second highest ever paid to shareholders.

As Dr Holmes noted, the company continues its cautious stewardship of the business while maintaining open and frank communications with shareholders. Combined with zero dollars in bank debt, ample funding facilities and a strong cash flow it is apparent that 1300 Smiles is in a good position to grow earnings in future periods.

And if there were any further proof required, investors need look no further than the meteoric rise of Pacific Smiles Group Ltd (ASX: PSQ), another listed dental company that has soared nearly 60% amid heavy demand since its ASX debut in December.

Investors want more smiles, and with the success of 1300 Smiles Limited it’s not hard to see why.

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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