Valuing the Run Rate Business w Balance Sheet Capacity…Alright, now’s the time for this company to succeed. The broader environment it set up perfectly for them. More and more focus is being put on cashflow and EBITDA positive businesses that are not dependent on outside capital and are in secular growth businesses that have the ability to grow regardless of the macro environment.
I think VitalHub checks all the boxes on this one, not bashing Well Technologies here but I think the biggest difference is that Vital Hub is already cashflow positive with a proven business model where Well Technologies is still buying businesses losing money and going to try to figure it out later.
But we are here to talk about VitalHub, I am going to just lay it out there I am not a fan of the Sri Lankan research center but they are doing so much right that has been announced but not hit the income statement yet that they are not getting credit for, and for that it is one of my top 5 strategic & tactical buys in small cap tech and healthcare (URL.ca AT.V BTV.V UI.V & VHI.V)
Lets Dig In;
Annual Contract Value
This is the crux of my argument that once the business is consolidated for a year the Annual Contract Value the core high value run rate business is worth a boatload.
Annual Contract Value as of Q2 - $5,321,119
Add: Nova Scotia Contract – Contract announced but not starting to hit the income statement a big way till Q4 which will add up to $2,300,000 in ACV.
Add: Organic Growth – The organic growth has been real strong just if you take the organic QoQ growth rate it equates to 45% growth. Pretty Darn impressive. There might be some timing of contracts and one time set ups revenues in there so let’s say the organic growth rate on a normalized basis is running 20 – 30% or 25% at the midpoint. This would add up to $1,330,000 ACV.
Add: Acquired Revenue – They have done a great job growing within their means and being a disciplined buyer looking at acquisitions at 1 – 2x Sales and 60% being recurring on an annual contract basis.
Given current state of the balance sheet after debenture repayments you have $2.65M in cash on hand, add the $1.4M in line of credit at a great rate of PRIME + 2%, add 1.0M in warrants exercised at 0.18/share and another $500K of EBITDA generation you have access to $5.55M of cash to use for acquisitions without having to issue a single share.
So at the midpoint of 1.5x Sales acquisition multiple with a 60% recurring revenue base they are able to add up to $2,200,000 ACV.
TOTAL - $11,151,119 Annual Contract Value in FY20
One Time Service & Set up Revenue
VitalHub core business is up to more or less 50/50 Recurring vs Service & Setup as of last Q. Given the organic growth rate is so high this figure along with EBITDA margin should continue to work its way higher over time.
Annual One Time Service & Set Up as of Q2 - $5,321,119
Add: Incremental Annualized Organic Growth - $1,330,000 *I am not sure the relative breakdown of the Nova Scotia contract so I am not going to include any incremental service and setup here.
Add: Acquired Revenue – The 40% of the of the non-recurring portion of the acquired revenue as previously calculated is $1,480,000
TOTAL - $8,131,119 in One Time Service & Set up Revenue
TOTAL REVENUE TARGET - $19,282,238 (58/42 Recurring Revenue * This is the key number to continue to drive higher, as it moves higher so will the valuation and profitability)
Profitability
No complaints here, one of the few companies down market cap that is putting up operating cashflow and EBITDA on strong repeatable/defensible margins. Given the strength and nature of revenue I think you can still see further margin expansion.
The nature of recurring revenue will always be associated with higher margin revenue especially as the platform scales. In many cases it can support EBITDA margins running as high a 40 – 50%. However, on a blended basis I think by the time you reach the end of FY20 you could be at an EBITDA margin run rate pushing 30%.
I think we could can be conservative here and assume a 25% EBITDA margin.
I need to make a critical point here; these are the exact type of businesses I look for. They are asset light which results in very little CapEx requirements so all the operating cashflow or EBITDA they generate can be funneled right back into the business whether it be organic growth or further acquisitions. For a bonus, clean balance sheet makes life a lot less stressful. Once again checks all the boxes. This is the origin story to the great capital compounders in the stock market, where you just buy ‘em and hold on forever.
TARGET - $4,820,560 EBITDA
Valuation
This is where the rubber hits the road, whether you look at WELL.V which at its peak was trading at >6x Annualized Sales or RHT.V at its peak trading at a Price/Sales multiple of ININFITY – because they had no collectable sales!!!
VitalHub has something that neither of those two companies have, a history of generating stable cashflow and EBITDA, it should trade at a premium for this. WELL.V trades at a premium valuation given the past history of the CEO selling his last business well I got news flash, the VHI.V CEO did the same thing.
All the bickering aside this a high value recurring revenue business with strong EBITDA margins. I come back to my north star of valuation. 4 x 1 Sales (4x Recurring 1x Service/Setup) or 20x Free Cash Flow multiple.
On a 4 x 1 Sales Metric I get a price target of 0.31/share or exactly 100% upside.
On a 20x Free Cash Flow I get a price target of 0.55/share or 230% upside.
You pick your metric you want to look at, I say higher.
This is the newest member of my Big 5 Small Cap, High Growth, Asset Light & Burgeoning Cashflow Monsters.
Anything under the 0.18/share where the recent warrant exercise price crossed I don’t think you can go wrong in the long run.
LONG