Dental Corporation Of Canada Inc.

An expanded office network brings economies of scale and better bargaining power in dental supplies purchasing. At the same time, it requires additional investments in corporate infrastructure, including human resource management, which could result in profitability pressure. To continue to attract and retain dentists and hygienists, the company might have to offer more competitive compensation. Otherwise, it could face a loss of productivity or high costs of substitution, affecting its top line and profitability. The stable outlook reflects our expectation that Dentalcorp will continue to pursue acquisitions that will drive double-digit revenue growth, and that EBITDA margins will remain stable. We also expect the company's aggressive debt-financed growth strategy will keep adjusted leverage above 8x through 2020. We could lower

...Dental Corporation of Canada Inc.'s (Dentalcorp's) aggressive strategy of growth through debt-funded acquisitions leads to high leverage. The Canadian dental market remains highly fragmented, giving Dentalcorp a significant opportunity to further expand its size via acquisitions and leverage its infrastructure and growing purchasing power with suppliers. The company's expansion strategy focuses on acquiring existing practices rather than on opening de novo sites, where it has to build practices from scratch. We expect the company to continue funding its acquisitions with debt, resulting in leverage sustained at above 9x. Such leverage is in line with peer 'B-' rated DSOs, such as Heartland Dental, which also has an aggressive growth strategy. Moreover, we believe that as the industry continues to consolidate, competition for attractive practices will heighten, thereby driving up the purchase multiple and resulting in higher leverage for the acquirers. At the same time, though acquisitions...

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