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A Broker's PreView - No Sign of Decay in Abano Check-up

Overview: Abano Healthcare is a leading provider of Dental, Radiology and Audiology services in Australasia. The Company released their full result this week, bringing a smile to investor’s faces.

Pros: Drilling down into the result, we can see very strong growth in underlying earnings, up 46 percent on last year. Gross Revenue was up 10 percent to $300m, with the company’s dental division leading the way, making up 70 percent of Gross Revenue.

Abano boasted 173 dental practices as at the 31st of May, and is adding a new practice every two or three weeks. Their practices operate under the Lumino brand in NZ and Dental Partners in Australia. Abano have refined the art of acquiring stand alone dental businesses and rebranding.

These purchases are usually earnings accretive from the get go, with investors in Abano benefiting from the premium that is generated when businesses move from private to public ownership. The premium can be attributed, in part, to the lack of liquidity in privately owner businesses, which leads to there being less buyers and therefore lower selling prices. Abano fills the gap between private sellers and public buyers, offering private buyers a lower premium than what the public buyers, i.e. shareholders, are willing to pay. Current shareholders are the beneficiaries of this.

Cons: Growth by acquisition is not without its risks. Companies who succeed in this strategy must be careful not to bite off more than they can chew, or acquire clinics to the point where their branded clinics are competing with each other and therefore cannibalising each others sales.

There is also the chance of making poor investment decisions, something that Abano have rectified recently when they sold their underperforming Pathology and Orthotics businesses. The sales of these businesses resulted in a $9m non-cash loss and reduction in goodwill. Adjusting for this turned their strong underlying profit into a Net Lost after Tax of $1.3m.

The company generates close to half of there gross revenue in Australia, so will have to watch currency fluctuations carefully. They will also have one eye on medical tourism, as this option becomes more readily available.

Price performance: Abano’s share price is up slightly after their result and relatively flat for the year. The share price has doubled since late 2011.

Investment outlook: Margin expansion through scale offers good upside, but not without risks.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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