Modern Dental

INTRODUCTION

Modern Dental is a family-owned company based in Hong Kong, which produces and distributes dental prosthetic devices mainly in Europe, China, North America, and Australia.

Given the growth that it has achieved in the last years, and the promising perspectives for the future. I think it deserves a higher valuation than it currently has.

OPPORTUNITIES AND STRENGTHS

On the positive side, the inversion of the demographic pyramid, especially in Europe, will likely increase the demand for Modern Dental products. An aging population will require more of its services. Beyond that, given the markets in which it operates, many of these new customers will be willing to spend on the quality products Modern Dental offers.

In addition to that, Modern Dental operates in a very fragmented market, with very small competitors. With the increasing role of technology, such as with the digitalization of scanners data, some volume scale advantages will appear, taking a good amount of business from smaller competitors. This is already causing a slow consolidation of the sector.

In fact, the pandemic has likely helped in the market share increase of Modern Dental. Small competitors with financial positions not so healthy went out of business, leaving new opportunities for Modern Dental.

Modern Dental does not operate in a cyclical market, but the global scope, gives it some additional resilience to market cycles.

RISKS AND WEAKNESSES

Traditionally this business has been performed by local companies. So in some markets, Modern Dental can find some challenges in adapting its operations to the local cultures.

The lack of other prominent players in this segment, makes us wonder, if there might be some other reasons which make it difficult for a big player to take a big chunk of the market.

In the following slide of the presentation of the 2021 results. We can see how in some markets, like in France, with only a tiny percentage of the total market share, Modern Dental is the leader.

Market Fragmentation – 2021 Results Presentation

One of the reasons for this leadership is its position in the middle of the Global Dental Industry Supply Chain, where no other big players are operating at the moment.

Position within the Global Dental Industry – 2021 Results Presentation

VALUATION

The recent growth in 2021, seems to have been caused by two leading causes. In 2020 due to the lockdowns, there was a decrease in the activity. And, on the other hand, thanks to the healthier financial position, Modern Dental, must have been able to steal some market share from smaller competitors.

We cannot expect the same growth in the following years. But, we can take as a reference the compound average growth rate of Revenue of 17% in the last nine years.

If, being conservative, we assume only 10% in the following three years. And an operating margin of 10% (it was 16.7% in 2021, though smaller in previous periods). We will estimate an Operating Income of HK$393. Using a multiple of 15 (taking into account the expected growth) and removing the current net debt (HK$165), we get an intrinsic value of around HK$6. It gives us a revaluation potential of 112% in 3 years.

CONCLUSION

It isn’t easy to know the reasons for misalignments between the market price and the intrinsic value. But the current price does not seem to reflect the potential growth in this resilient busineoperate in a cyclical market, but the global scope gives it.