Ann: Sale of Retail ICT and Sprout Business, page-44

I am in agreement with other posters that the ICT deal seems to be a dud. Below is my back of the coaster valuation on the assets of the remaining business. This is all in my own opinion so DYOR.

API acquired Clear Skincare Clinics in 2017 for $127 million. Clear Skin Care then had 44 stores, which were largely company-owned. This is a value of $2.89 million per clinic. EBITDA at the time was $14 million so average earnings per clinic was $318,182.

When Silk Laser (SLA) recently acquired Australian Skin Clinics (ASC) they paid $52 million (SLA Announcement 18/06/2021). ASC had 65 clinics that were largely franchised clinics (Aust. - 35 franchised/4 company/2 joint-venture & 14 NZ clinics under a ‘Country Development license’). Franchised clinics would be expected to be valued lower and contribute reduced EBITDA per store. This values a franchised store network model at $1.18 million per clinic. ASC is expected to contribute ~$4.9 million to SLA this FY so they have paid a multiple of just over 10 times earnings.

SLA currently has a MC of ~$220 million with 118 clinics. It is now a mix of company-owned and ASC franchised stores (which will contribute lower earnings). The value per clinic is $1.86 million, which could arguably define the lower end of the clinic valuation scale. In the Silk prospectus (Prospectus - 14/12/2020) it was mentioned that mature clinics ( defined as > 3 yrs old) on average deliver EBITDA of $278,000. Silk generally competes at the price-driven, lower end of the market.

The Artisan clinic set up costs to date probably are higher than would be expected given the set up of roles such as medical director/s, trainers, regional managers, marketing director and social media coordinator, etc. These fixed costs won’t change significantly if the numbers of clinics doubles or triples, which will spread the fixed costs over a wider base. If the clinic numbers don’t expand rapidly I would be hoping they swing the axe on bloated structures, board salaries and unnecessary costs and roles.

The 20 Artisan clinics are company-owned, so if the clinics were sold to someone like SLA (who already has the infrastructure above and could cut costs & deliver synergies) then Artisan would potentially be valued in $1.86 - 2.8 million range per clinic, so $37-57 million or 0.22-0.34 per share based on 165.6 million shares on issue. The $35 million from the ICT deal would equate to an additional 0.21 per share. With the $35 million they can potentially acquire another 12-19 clinics at the valuations above which will potentially deliver earnings of $278,000-318,000 per clinic within 3 yrs. Alternatively, they could use the funds to set up a greater number of greenfield clinics delivering the same EBITDA within an ~3 yr timeframe that would ultimately be worth more per share in 3 yrs time. All in we have a standalone business potentially worth $0.43-0.66 plus the dividend with FC from the ICT sale of $0.56-0.64. It would be good to confirm if there is any additional cash retained from the ICT business as this would add additional value.

In VTG’s defence, achieving any level growth in Artisan during COVID is impressive. And there could be potential acquistion opportunities in the form of cash-strapped clinics dealing with lockdowns in Sydney and Melbourne so it may be good timing. If there was the opportunity to acquire the 80-odd Clear Skincare Clinics as part the current API takeover it could be a very good fit as they both use some of the same treatment technologies and both compete at the quality end of the market, so less training to integrate staff. The other option to consider is selling off the whole thing to someone like SLA and shareholders taking the sale price and the surplus cash.