New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Abano Healthcare Group</h2>
<p><strong>Another&nbsp;COVID&nbsp;Check-Up</strong></p>
<p><strong>NEUTRAL</strong></p>
<p>COVID-19 related restrictions are easing, with&nbsp;Abano&nbsp;Healthcare&nbsp;(ABA) recommencing a full range of dental services, slightly earlier than previously envisaged; the next question turns to how long it takes to revert to pre&nbsp;COVID-19 earnings. This is contingent on consumer behaviour. We expect dentistry to fully recover, albeit forecast it to take time.&nbsp;Retain NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/578/original/image_82981730421589500999592.png?1589500999" class="editor-image img-responsive" data-smartkarma-image-id="133578"></figure>
<p><strong>Supply picture becoming clearer</strong></p>
<div id="m_-2512340838512749347ii48s">
<p>COVID-19 related restrictions are being eased in both Australia and New&nbsp;Zealand, enabling a return to near 'normal' in service offering, a little faster than previously anticipated.&nbsp;Social distancing and health &amp; safety measures may have a drag&nbsp;on throughput (appointment spacing) and costs, however, we expect this is likely&nbsp;modest.</p>
<ul>
<li><strong>Australia</strong>:&nbsp;ABA&nbsp;practices&nbsp;were closed from 30 March, re-opening from&nbsp;27 April (albeit with material restrictions on services permitted) and expected to return to full service this week post a further relaxing of restrictions in Australia on 8 May. Hence, full closure for c. four weeks with an additional c. two week period of a restrictive offering.</li>
<li><strong>New&nbsp;Zealand</strong>:&nbsp;Dental&nbsp;practices&nbsp;were closed from 26 March to 13 May inclusive (with the exception of some emergency care), a total of c. seven weeks. New&nbsp;Zealand's&nbsp;move to Alert Level 2 permits re-opening.</li>
</ul>
</div>
<p><strong>Demand still the key unknown</strong></p>
<div id="m_-2512340838512749347igmb9">
<p>Dentistry is a domestic&nbsp;focussed, relatively&nbsp;defensive&nbsp;industry that we expect to recover, although it is unlikely to be fully immune to an economic downturn. However, the pathway to recovery will likely take time and is contingent on the virus trajectory, government policies and consumer behaviour. This remains difficult to forecast. Key considerations for demand / revenue include:</p>
<ul>
<li><strong>Pent up demand</strong>:&nbsp;Particularly for 'necessity' procedures where spending will most likely have been deferred.</li>
<li><strong>Consumer anxiety</strong>:&nbsp;Consumer perception of the risks of close proximity required at a dental appointment. Communication around health and safety measures being undertaken will be important.</li>
<li><strong>Dentist holidays</strong>:&nbsp;Dentists are paid on commission so there is a material incentive to return to work. The number of clinical days worked is a key driver of&nbsp;ABA&nbsp;revenue. We expect this may be higher&nbsp;than usual in the near-term (less holidays, desire for income).&nbsp;</li>
<li><strong>Economic backdrop</strong>:&nbsp;With rising unemployment and other household pressures, consumers ability to spend will feature.</li>
</ul>
</div>
<p><strong>Balance sheet&nbsp;offers limited flexibility</strong></p>
<div id="m_-2512340838512749347i6x8h">
<p>ABA has net debt of NZ$130m, with headroom of ~NZ$33m — gearing was already high pre COVID-19. We expect that bank covenants are likely to be breached due to the temporary closure, however, we expect banks may be more accommodating of a short-term breach in the current circumstances. A plan may be required by Banks to de-risk the balance sheet. There is also potential a dental roll-up strategy is more attractive out the other side, through a reset to vendor expectations and/or business distress, with the dental industry still highly fragmented. This could also influence any future capital decision making.</p>
</div>
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<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
</div>
</div>
</div>

Abano Healthcare Group
Another&nbsp;COVID&nbsp;Check-Up
NEUTRAL
COVID-19 related restrictions are easing, with&nbsp;Abano&nbsp;Healthcare&nbsp;(ABA) recommencing a full range of dental services, slightly earlier than previously envisaged; the next question turns to how long it takes to revert to pre&nbsp;COVID-19 earnings. This is contingent on consumer behaviour. We expect dentistry to fully recover, albeit forecast it to take time.&nbsp;Retain NEUTRAL.

Supply picture becoming clearer

COVID-19 related restrictions are being eased in both Australia and New&nbsp;Zealand, enabling a return to near 'normal' in service offering, a little faster than previously anticipated.&nbsp;Social distancing and health &amp; safety measures may have a drag&nbsp;on throughput (appointment spacing) and costs, however, we expect this is likely&nbsp;modest.

Australia:&nbsp;ABA&nbsp;practices&nbsp;were closed from 30 March, re-opening from&nbsp;27 April (albeit with material restrictions on services permitted) and expected to return to full service this week post a further relaxing of restrictions in Australia on 8 May. Hence, full closure for c. four weeks with an additional c. two week period of a restrictive offering.
New&nbsp;Zealand:&nbsp;Dental&nbsp;practices&nbsp;were closed from 26 March to 13 May inclusive (with the exception of some emergency care), a total of c. seven weeks. New&nbsp;Zealand's&nbsp;move to Alert Level 2 permits re-opening.


Demand still the key unknown

Dentistry is a domestic&nbsp;focussed, relatively&nbsp;defensive&nbsp;industry that we expect to recover, although it is unlikely to be fully immune to an economic downturn. However, the pathway to recovery will likely take time and is contingent on the virus trajectory, government policies and consumer behaviour. This remains difficult to forecast. Key considerations for demand / revenue include:

Pent up demand:&nbsp;Particularly for 'necessity' procedures where spending will most likely have been deferred.
Consumer anxiety:&nbsp;Consumer perception of the risks of close proximity required at a dental appointment. Communication around health and safety measures being undertaken will be important.
Dentist holidays:&nbsp;Dentists are paid on commission so there is a material incentive to return to work. The number of clinical days worked is a key driver of&nbsp;ABA&nbsp;revenue. We expect this may be higher&nbsp;than usual in the near-term (less holidays, desire for income).&nbsp;
Economic backdrop:&nbsp;With rising unemployment and other household pressures, consumers ability to spend will feature.


Balance sheet&nbsp;offers limited flexibility

ABA has net debt of NZ$130m, with headroom of ~NZ$33m — gearing was already high pre COVID-19. We expect that bank covenants are likely to be breached due to the temporary closure, however, we expect banks may be more accommodating of a short-term breach in the current circumstances. A plan may be required by Banks to de-risk the balance sheet. There is also potential a dental roll-up strategy is more attractive out the other side, through a reset to vendor expectations and/or business distress, with the dental industry still highly fragmented. This could also influence any future capital decision making.




Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262




Abano Healthcare Group: Another COVID Check-Up