19/06/2006
Oasis Healthcare has many of the attributes that investors should find attractive in an AIM company.
It is a business of a substantial size, it has an experienced and entrepreneurial management team and it is operating in a sector whose prospects have been transformed due to a change in legislation. Another positive to throw into the mix is a recent restructuring programme that should enhance earnings in the long term and, most importantly, the simple fact that it is on the verge of posting a profit after six long years as a loss-making public company. This is probably the reason why it has just received a tentative approach that could lead to a bid for the group.
Strategy
The group’s strategic goal is the same now as it has always been, namely to build up a chain of dental practices throughout the UK, benefiting from the kind of buying power and economies of scale that only businesses of a certain critical mass can attain.
Unfortunately, prior to the very recent takeover talk, the market has not been so enamoured with Oasis. This is largely because the previous business plan, centred as it was around a centrally managed branded operation, failed to provide a sufficient level of group efficiency or coherency. The method by which dentists within the group split their revenues with the parent company also proved troublesome – as did the significant level of debt that was taken on to grow the network in the first place.
It all reached something of a nadir in 2004, which was when current chief executive Stephen Lambert was drafted in to try to reinvigorate the company.
Reinvigorate Oasis he certainly has. Its significant debts have been renegotiated, loss-making practices have been closed and Oasis seems to be on a growth curve that is as much focused on creating profits as it is on building revenues.
Says Lambert: ‘It’s fair to say that we have come through a difficult phase these past 18 months but I believe that the business is now beginning to demonstrate that it can deliver. Our model is correct, our market is moving and as we are highly operationally leveraged – I believe the profits will now begin to fall out.’
Oasis’ current business consists of over 122 practices managed according to a ‘cluster concept’ based on specific geographic areas. Each cluster has a clinical and operational management team that delivers ‘efficient localised decision-making’. This enables the group ‘to provide a targeted delivery service to the patients in its area. It ensures we have all the specialised skills we need in each locality,’ asserts Lambert.
There is of course a layer of regional and national management above this, but the devolvement of the day-to-day operations seems to be working wonders for motivation in an industry famed for its independently-minded practitioners.
In the year to March 2006, around 68 per cent of Oasis’ revenues of £82.5 million came from ‘private’ practices, with the remainder being derived from the NHS. In April, however, the laws governing how NHS dentists are organised and paid changed significantly.
For a start, the 400-odd different charges of the old dentistry system were reduced to three bands. In addition, NHS dentistry is now locally commissioned – with Primary Care Trusts having the money to plan and pay for local services (if a dentist leaves the NHS or reduces the amount of his or her NHS work, the PCT can buy in replacement services). Perhaps more importantly, dentists have been taken off the ‘drill and fill treadmill’: instead of being paid for each and every bit of work they do, they are now paid according to particular courses of treatment (or ‘units of dentistry’) and are guaranteed an average wage of around £80,000.
Says Lambert: ‘The changes are significant, very significant for us. It basically means that all of our practices that are committed to NHS work are contracted. We will be paid. It provides fantastic revenue visibility for us and acts as a great motivational tool for the dentists in our practices.’
Together with an extensive refurbishment and development plan that saw 36 surgeries improved last year – not to mention an array of incentive and ongoing training and IT programmes – Lambert is convinced that Oasis’ history of poor management of dentists – and its equally poor management of the profit and loss account – is over.
Management
Chief executive Stephen Lambert joined Oasis from Punch Taverns in 2004, where he was CEO between 2000 and 2002 and instrumental in building up the business from 70 pubs to a 700-strong chain. Much of his time was taken up with the integration of the three businesses that Punch bought from Bass, Allied Domecq and Inn Business. Prior to this he was actually chief executive of Inn Business, a venture he joined as finance director in 1994. Although this means he doesn’t have many years’ knowledge of the dental sector, he does have a great deal of experience (and success) motivating self-employed individuals and increasing their effectiveness within a larger group.
Another similarity is that both Punch and Oasis have been grown with debt, so he undoubtedly understands the importance of cashflow management.
In the chairman’s seat sits Ron Trenter, something of a retail expert. He was appointed to the managing director seat of Texas Homecare in 1980 and in 1991 became chairman and chief executive. Previously executive chairman of Upton & Southern he has also spent time as a director of Home Charm Group and Ladbroke Retail Parks (a division of Ladbroke Group).
The senior non-executive chairman is Michael Frank, a director of NatWest Markets Corporate Finance until 1997 and deputy chairman of Matrix Communications.
Prospects
Oasis’ last set of results were very encouraging. Revenues improved from £74.9 million to £82.5 million, like-for-like sales hit 13 per cent and despite a refurbishment campaign – and the extra cost associated with implementing the effective ‘cluster’ management structure – the loss before tax was £366,000 (against £2.89 million last time).
Central costs were kept at four per cent of sales and group debt reduced by £2.5 million to £37 million. According to Lambert, this renegotiated debt is very much manageable. ‘Our EBITDA-to-debt ratio has moved from 4.9 times to 6.5 times. It’s equally worth knowing that £35 million of the total is fixed and capped at today’s interest rates. I’m comfortable with where we are in relation to this.’
Giving Lambert even more comfort is Oasis’s growth prospects. Total capital expenditure last year was £4.1 million, of which £2.9 million related to modernising around 36 existing surgeries.
£1.8 million was spent on eight new Welsh NHS practices. ‘When these are up and running they will contribute something in the order of £5.2 million of revenue.’ Another NHS practice win, in Chepstow, is expected to add £0.5 million in revenue and more business gains are expected to follow.
Says Lambert: ‘I am confident that the private business we have is on a sound footing and will maintain its trajectory. As for the NHS, the new tendering contracting system is likely to benefit businesses like ours. The win in Wales has convinced us that community based practices that have scale and a full complement of dental services will thrive.’
A further positive note is sounded on any new openings which ‘will be funded by cashflow’ not further debt.
Valuation
According to Lambert, Oasis has an enterprise value of around £50 million, compared to its market cap of £21.4 million.
This year, the market is expecting it to score revenues of £93.3 million and a pre-tax profit (before exceptionals) of around £3.9 million. Over 50 per cent of this income is NHS and therefore ‘contracted’.
For 2008, revenues are slated to move higher to £99.5 million, shaking out profits of £4.8 million.
Even after the recent run up in the shares following the announcement from Lambert that a predator was lurking with a view to bid, the group is trading at just above eight times expected 2007 earnings, a rating that falls to six for 2008.
Any bid, were it to materialise, would have to be substantially above the current 26.25p. And even if nothing comes of the negotiations, the underlying fundamentals of the business would appear, at long last, to be very sound. The price needs to double before fair value is reached.
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