Why Soul Patts is a major shareholder of Pacific Smiles Group Ltd

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has one of the best outperformance records over the long-term in the market.

Over the past 15 years Soul Patts has delivered total shareholder returns of 12.8% per annum, outperforming the All Ords Accumulation Index by 3.9% per annum.

It has major investments in shares like TPG Telecom Ltd (ASX: TPM) and Australian Pharmaceutical Industries Ltd (ASX: API) but it has also invested large enough sums of money in some other businesses that it had to declare that it’s a major shareholder of that company.

One of those substantial shareholder declarations was about the company Pacific Smiles Group Ltd (ASX: PSQ).

Pacific Smiles provides dentists with fully serviced and equipped facilities including support staff, materials, marketing and administrative services.

It operates in over 65 dental centres throughout New South Wales, the Australian Capital Territory, Queensland and Victoria with a team of 800 staff and more than 300 dentists.

Interestingly, seven of those dental centres are NIB Holdings Ltd (ASX: NHF) centres, I think it’s a clever strategy to work with the fastest-growing private health insurer.

Pacific Smiles is a growing business, in FY17 it grew the number of dental centres by 21%, adding 12 new centres.

In FY17 it grew patient fees by 9.8%, same centre growth was 3.8%, underlying patient fees grew by 6.3%, underlying net profit after tax (NPAT) grew by 1.3% and underlying earnings per share (EPS) grew by 1.3%.

The business has three avenues of growth in the future. More than 40% of centres are less than three years old, meaning that those centres can create more loyalty with the local population.

Pacific Smiles is targeting at least 10 new centres per year, the long-term potential is that the network could have at least 250 dental centres.

Management aim to create margin expansion with increased scale and operational improvements.

Foolish takeaway

Pacific Smiles is currently trading at 26x FY17’s earnings with a grossed-up dividend yield of 4.84%. Management expect earnings before interest, tax, depreciation and amortisation growth of around 10% for FY18, which should mean a solid result.

Pacific Smiles is an interesting idea and I’ll be keeping a close eye on the business to see if it becomes better value.

Until then, I’ll be trying to buy these hot stocks at a good price.

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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Australian Pharmaceutical Industries Limited and NIB Holdings Limited. 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.

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