Ryan IrvineIt should be noted that he only recommends a half dozen stocks a year and doesn't like most of the ones that he reviews. GLTA
Your Stock Our Take
Came in from Thomas, one of our Canadian Small-Cap clients. And he wanted us to compare Nova Leap to the Healthcare company that I have been touting on the podcast for the last few weeks. (Which I am not going to say the name of).
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Nova Leap Health (NLH:TSX-V)
Current Price: $0.74
Market Cap: $58.6 million
What does the company do?
Nova Leap is a home health care services company operating in the U.S. & Canada. The company performs a vital role within the continuum of care with an individual and family centered focus, particularly those requiring dementia care. The company’s service offerings include meal preparation, housekeeping, transportation, personal care, and medication reminders.
Key Points:
- Mid Q2 the company closed a CAD$5.5 million private placement.
- On August 3rd, 2021, Nova acquired a New England Home Care Business for total consideration of $660K. The Target reported unaudited revenues of approximately $1.697 million, and EBITDA of approximately $155,000 for the year ended September 30, 2019. (4.25x trailing EBITDA).
- On August 4th, 2021, Nova acquired Home Care Business in Oklahoma for total consideration if $1.1 million. The Target reported unaudited revenues of approximately $2.3 million for the 2020 calendar year. (No EBITDA but 0.5x sales)
- Management said that one area of disappointment was an additional goodwill impairment of $600K. We do have one business unit that has not met our expectations. While acquiring turnaround situations is inherently difficult, and while certain progress has been made, we felt that the time it will take to achieve our expected results warranted an impairment at this time. (Shows that not all acquisitions have been exactly successful – may have overpaid for the business).
Recent Financial Results (Q2, 2021) – All in USD
- Revenue increased 28% to US$5.1 million compared to the same period last year.
- Adjusted Net Income for the Quarter was a loss of US($243K) compared to a loss of US($72K) for the same period last year.
- Q2 Adjusted EBITDA declined 70% to US$43K from US$160K for the same period last year.
- Balance sheet – Including the recent forced conversion of some convertible debt, I have the company with a net cash position of approximately US$2.8 million.
- Now lets get into the valuations here:
- Trailing Adjusted EBITDA for the business was approximately US$88K. So if we consider similar EBITDA margins for the Oklahoma acquisition and add in US$155K EBITDA from the New England business, Nova Leap’s consolidated trailing results should come in at approximately US$404,000.
- With a enterprise value of approximately US$44 million and my trailing EBITDA estimates above (which includes the recent two acquisitions) I come to a trailing EV/EBITDA multiple of over 100x.
- Now I do want to note that in 2019 the company did $907K in
EBITDA and in 2020 it did $462K. But we have sort of seen the company jump up into profitability and now dip back below profitability… or at least have seen it come back to where it is just marginally profitable. To give the company the benefit of the doubt, if we projected that the company could return to its high-water market of $900K in annual EBITDA along with the additional EBITDA from its recent acquisitions, we would still be at an EV/EBITDA multiple of approximately 30x. SO I PERSONALLY BELIEVE THE COMPANY IS MORE ON THE EXPENSIVE SIDE OF THINGS RIGHT NOW.
- And to put this into perspective – I am not going to say its name for clients sake – but the healthcare company that I like is growing at similar if not better rates and is trading at about 14x 2021 EBITDA.
Conclusion:
To conclude, I like Nova. It operates in a great sector, has a net-cash position, is breaking into profitability, and making acquisitions at accretive multiples – despite management indicating that they had overpaid impaired of one of their investments (which isn’t a great sign). But right now what really pushes me away from the business is its current valuation of around 30x its potential run-rate as a business. Personally, I believe there is better bang for the buck opportunities in the small-cap healthcare sector in Canada, which of course I have been touting time and time again on the podcast.