Somewhat unique business, very uniqe management

It often strikes me how the stock market is a great teacher, and - no matter how long one participates passionately in - how there are always new lessons to be learned, or how new reminders of past lessons continuously arise.

ONT is an example of the latter: the reminder here being that during buoyant times even bad businesses can appear to be prospering, but it is only the truly defensible and robust businesses that can survive and recover from the 1-in-a-1,000 chance mega torpedo that comes from left field.

In ONT's case that torpedo was the federal government's pulling the plug in November 2012 on the Chronic Disease Dental Scheme (CDDS). That pulled a billion dollars out of a $5bn industry in Australia (!)

Up until that point, ONT has been growing its Revenues and Profits at a rate of 20% pa.

Needless to say, the impact of the cessation of the CDDS on ONT was significant: In the 12 months after the CDDS was cancelled, ONT’s Revenue and Profits fell by more than 25%.

Anyone who is contemplating investing in ONT would do well to read what the company’s CEO, Daryl Holmes, was saying and writing at the time. It gives tremendous insight into the people driving this business.

As a shareholder, I recall reading at the time about what the company was saying about its future and how management viewed the future unfolding and I can remember thinking to myself, “Gee, they sound pretty sure of themselves and of the company’s ability to recover from this and to continue its growth trajectory.” And I have to admit to feeling somewhat less confident in the sort of future that Holmes was describing, once the dust had settled on the CDDS debacle.

To be sure, Holmes was not mincing words; he was at great pains to not understate the significance of what the company, and the dental industry in Australia, was about to go through. What struck me about it all was the sheer frankness and candour with which the man spoke. But he was very clear in saying that the situation would create opportunities for ONT, and that the company would recover, and resume its growth trajectory.

And today, when I re-read the various statements and shareholder communications made by him, and compare it with the result the company just reported (22% growth in Revenue and 37% growth in Net Profit, EPS and DPS), the prescience of what he was saying some two years ago becomes even more pronounced.

If the vast majority of businesses were to have been subjected to the sorts of acute disruption that ONT was over the past two years, the vast majority would never have recovered and many would have ceased to exist.

Yet ONT is today generating essentially the same level of profitability as it did immediately prior to the point of the end of the CDDS, an even that sucked one dollar out of every five out of the industry.

Try to consider what would happen if the size of the respective markets serviced by the vast majority of publicly listed companies shrunk by 20%.

Would the outcome be normalisation of profitability – both in quantum and in the rate of growth – within two years?
I think not!

That’s the thing about ONT: it’s a modestly unique business run by very unique people.

On that not, it is worth noting that the CEO earned $90,540 in FY14, including superannuation benefits. (He took a 20% pay cut from the previous year even though the fall in the company’s profits from the prior year was entirely due to the CDDS issue, a completely extraneous factor. Yet to CEO took a haircut (sure, it was only a $21,000 reduction, so not of the order of magnitude of sheep stations by any measure, but still, the cultural example it sets is a very good one).
The entire board of directors costs shareholders less than $200,00 pa.
You show me a CEO and a board of any company on the Australian Stock Exchange who earn less. (In fact, one of the issues I have is that the three-person board is actually too small, and that for the sake of governance, it should be expanded by at least one director, especially as it continues to expand.)

What the CEO does do is he owns 60% of the business. And, as he explains it, his reward for coming to work every day, is the increase in the intrinsic value of the business and hence, his share in it, manifest by the growth in dividends.


As for the all-important matter of valuation, yes, at point multiples of 20x P/E and 9.5x EV/EBITDA, it might not look cheap, but when you consider that it will be able grow at close to 20%pa for the foreseeable future – without recourse to shareholders for a single penny of capital – then I think one will find the growth quickly eats into the valuation multiples.

The discussion the accompanies the results today spoke of the anniversary of the company’s 10th year of existence, and that the next 10 promise to be as wealth creating as the past 10 for shareholders.

I have not been on board for all of the past 10 years, but my firm intention is to remain a shareholder of the business for the next 10.