After largely disappearing during 2017, volatility has made an emphatic return to global equity markets, leaving many investors assessing their exposure to risk assets.
We always like to keep a ‘watchlist’ of high quality companies so that in times of heightened volatility, we are well prepared to take advantage of any opportunities that may emerge. Though we await the delivery of its half year results with interest, due later in February, we believe one such opportunity may be that of dental services company, 1300 Smiles (ASX: ONT).

ONT owns and operates full-service dental and orthodontic facilities across New South Wales, South Australia, and in the ten major population centres in Queensland. ONT’s goal is to build out a national footprint over the coming decade.
ONT started life as Townsville Family Dental Pty Limited in September 2000 before listing on the ASX in March 2005. Upon listing, ONT had a total of 6 dental surgeries in operation in Queensland. Today, ONT has 30 established multi-dentist facilities, reflecting the steady build out of its footprint in recent years.
The company provides comprehensive services in the areas of marketing, administration, billing and collections, facilities certification and licensing to all dentists operating within its network. The company also provides all support staff, equipment and facilities, and sources all consumable goods using the buying power derived from a large (and growing) group of dental facilities. The services provided by the company therefore allow dentists to focus on the delivery of dental services rather than on the administrative aspects of their businesses.
Though only a small cap, ONT has a sound long term track record, with per share earnings, dividends and operating cash flow approximately tripling over the past decade. Operating cash flow has consistently exceeded reported profit, which in turn has allowed ONT to self-fund its growth objectives while also paying out consistent income to shareholders.
 

Figure 1: ONT EPS, DPS & OCFPS, 2008 – 2020F.
Source: ONT, SIV & Clime
As illustrated above, ONT’s sound track record is certainly reflected with its dividend history. With just one exception (2014), ONT has increased its annual dividend every year since listing on the ASX. So, while the headline yield may not instantly attract, in select circumstances such as this, we believe the 4.1% fully franked yield of today may well become the 5% or 6% yield of tomorrow.
Throughout its history, ONT has always maintained a strong (generally net cash) balance sheet. This has allowed the company to steadily and sensibly grow its network without significant dilution. As has been the case in recent history, ONT has used its cash reserves to bolt on several smaller scale acquisitions. In aggregate, we believe that this will assist the company generate a moderate level of earnings growth in the coming year/s.
In addition, concurrent with the release of its 2017 annual report, management noted:
“Along with the entire dental industry, we have seen slow growth for the past two years. There have been some specific factors affecting our company, most significantly the slowdown in the mining industry and the effect that had on many of our regional operations. There are indications, however, that the cycle is turning.
For a variety of reasons, the first half of each financial year has always delivered greater revenue than the second half. In the 2017 financial year, this pattern was reversed, with the second half delivering significantly higher revenues and profit than the first half, suggesting that we’ve seen the worst of the downturn.
This trend has continued in the early part of the 2018 financial year, with revenue in the first two months well ahead of that recorded in the same period last year.”
Despite the generally positive tone of commentary, we believe risk factors such as a weaker regional economy and a challenged Australian consumer remain. Full year FY2018 earnings forecasts suggest that growth in the order of 15% is currently expected to be delivered by the company. Beyond market wide volatility, short term performance will likely reflect how ONT is tracking against these expectations. Of course, we look forward to reviewing the half year result and updating our thoughts accordingly.
With this noted, market volatility over the past fortnight has again proved that in the short term, almost anything is possible. However, with a view towards longer term value creation, we believe ONT remains well placed to deliver a growing stream of earnings and dividends to patient investors over the coming years.
Adrian Ezquerro is a Senior Analyst and Portfolio Manager for the Clime Smaller Companies Fund, CSCF.
Clime Asset Management owns shares in ONT on behalf of mandates for which it acts as investment manager.