SME Bancassurance Expansion Will Improve Future Efficiency

Key Takeaways

• Strategic focus on bancassurance and SME growth is likely to enhance revenue, profitability, and customer acquisition.
  
• Improved cost management and tech investments optimize operations, boosting profitability and net margins.
  
• Heavy reliance on Bradesco Dental poses concentration risk, while high competition and economic fragility constrain revenue growth across segments amidst rising costs.

Catalysts

Provides private dental plans in Brazil.

• Odontoprev's strategic focus on expanding the SME segment through bancassurance channels is likely to drive volume growth significantly. This not only increases revenue but also improves the company's profitability due to the higher average ticket prices associated with SMEs compared to corporate plans.
  
• The diversification of the product portfolio with a greater emphasis on high-ticket non-corporate plans—such as individual and SME plans—is expected to increase contribution margins, which directly boosts profitability and net margins.
  
• Continuous improvements in cost management, such as advancements in technology and segmentation strategies, have resulted in a dental loss ratio consistently below historical levels. This efficiency reduces costs relative to revenue, positively impacting net margins and earnings.
  
• Odontoprev's strategic use of bancassurance to expand its reach and improve customer acquisition offers, combined with Bradesco Dental's strong brand presence, is anticipated to sustain growth in new customer acquisition, thus enhancing the company’s revenue growth potential.
  
• Investment in technology and the rolling out of more efficient digital processes are expected to optimize both operational efficiencies and customer engagement, thereby potentially enhancing revenue growth without a significant increase in operating expenses, leading to better net margins and profitability.

Odontoprev Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Odontoprev's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.2% today to 23.6% in 3 years time.
• Analysts expect earnings to reach R$643.5 million (and earnings per share of R$1.14) by about March 2028, up from R$539.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.7x on those 2028 earnings, up from 10.5x today. This future PE is greater than the current PE for the BR Healthcare industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.92%, as per the Simply Wall St company report.

Odontoprev Future Earnings Per Share Growth

Risks

• The heavy reliance on the Bradesco Dental brand, which constitutes more than half of Odontoprev's portfolio, suggests concentration risk and potential vulnerability to any negative changes in that partnership, impacting overall revenue.
  
• The corporate segment, despite its size, faces high competition, limiting ticket increase opportunities primarily to inflation-level adjustments, thus potentially constraining revenue growth.
  
• The non-corporate segment, particularly SMEs, presents opportunities but also risks due to higher economic fragility and potential churn, which could affect revenue stability in a challenging macroeconomic environment.
  
• Increasing costs, including dental equipment and potential higher usage rates as customers become better educated about benefits, may pressure margins if ticket prices do not rise proportionally.
  
• The substantial investment in technology over the past years may not significantly decline, limiting capital available for other strategic opportunities or dividend payments, thereby impacting net income growth prospects.

Valuation

• The analysts have a consensus price target of R$11.855 for Odontoprev based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$14.0, and the most bearish reporting a price target of just R$10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$2.7 billion, earnings will come to R$643.5 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 16.9%.
  
• Given the current share price of R$10.4, the analyst price target of R$11.85 is 12.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.