Deep Dive into Balance Sheet & Cash Flow in PTQ.V…So this appears to be the next area we have to discuss, I have heard too many comments surrounding cash needs and lack of cash flow. With the stock price down here where I think it’s a steal. So let's go through some numbers because I think the balance sheet is stronger then glancing at Q3 financials and creates one heck of a buying opportunity.
Lets Dive in;
Cash Position
If you look at the financials it reads $4.4M Cash. However, its much better than that. Add to that the bought deal this past fall at 0.60/share for $3.4M and insiders concurrent participation for another $1.1M for a total of $8.9M in cash. Keep that number in mind its going to come back real soon….
Unsecured Subordinated Debentures
The last hangover from the Dalsin and Greene era that Greg Crawford still has to address. Seems appropriate that the stock has struggled in 2019 because of it... but I digress.
$8.625M Unsecured Subordinated Debentures @ 7.5% Due December 2019 w warrants at 2.25/share expiring August 2019. You notice how close that figure is to the pre-existing cash balance, cash crunch is an inaccurate assessment.
However, they do have to think longer term here. With aprox. $1.5M outlaid for 3 accretive acquisitions that I loved this fall and if they want to continue along their acquisition program Greg has to address this. I think Casey over at Viemed could take note here, with all that cash just sitting on their balance sheet.
Both of them have done a great job growing their businesses state by state.
3 Options
1) Credit Facility – Greg and team have talked about this on their conference calls this year, and have delayed due to the fact that they didn’t have immediate cash needs and didn’t want to spend the money on a standby credit fees if they weren’t going to need it. Couldn’t agree more with Greg and his inaction in the past on this issue. I would just add, Greg and team are in much better negotiating position in terms and interest rate they can get compared to six months ago with a business now running 18% EBITDA margins and increasing relative to 6 months ago running 8-10% EBITDA margins.
2) Refinance Debentures – They could extend/reissue the underlying debentures and warrants of the debenture. They would have to bring down the warrant strike price but depending on terms of credit facility this could be a valid plan B
3) Cash Injection – Greg has a lot of money from all the Viemed shares he sold last year he could provide a related party loan for a portion of it and use a portion of the existing cash balance. Wouldn’t be ideal but it shows that they have optionality and its not life or death on the credit facility.
Availability of Capital
Protech already finances its equipment purchases through equipment financing at anywhere from 0 -11.5% not much different than Viemed that borrows at LIBOR + 3%.
Other small cap comparable names in the healthcare space all with credit terms you can look at for what they would be looking at;
HTL.V – 4.25%
CRH.TO – LIBOR + 2.5%
NLH.V – PRIME + 2.0%
There is clearly available capital for these stable businesses with predictable revenue streams no matter the market cap. On the rate front with US fed on hold and the 10yr treasury down 0.50% in the last three months and think rates are done going up. That includes LIBOR and PRIME.
Inventory Rebuild
Some people have mentioned the reduction in the carrying amount in inventory that cash will have to be used to resupply inventory. This might be true but let me just float another theory, Greg and his team have been rationalizing SKUs and moving away from low margin products to focus on higher margin products like the recurring respiratory resupply business.
If you look at Viemed does a great job running a lean inventory figure of aprox. $3M with a similar revenue business and Protech’s inventory is still higher than that at $5.8M which is still equal to 5 months of inventory purchases if you look at there fiscal year to date inventory purchases.
Cashflow in 2019
This is the crux of the debate, if you look at the first 9 months of the fiscal year you have Operating CashFlow of $9.3M and CapEx of $(10.5)M but if you hold working capital adjustments constant you have positive cashflow of $1.5M.
Let’s annualize that Capex Figure to get a figure of $(14)M in outflows and add another $(1)M for debt service.
Using a $90M revenue figure for FY19 at what EBITDA margin are we generating cash flow?
On those figures we are cashflow positive at a 16.67% EBITDA margin. They just put up a 18.3% EBITDA margin in Q3 (up 54% QoQ) and are talking about 20-22% looking ahead. BULLISH!!!!
So before you sell any more of your shares think about that figure and ask yourself one simple question, Can PTQ.V put up >16.67% EBITDA margin in comparison to Viemed putting up EBITDA margins in the 25-27% range?
If you think the answer is yes… back up the truck and get on the bid with me and we ride this thing back up.
If your answer is no…. sell your shares and go buy Viemed.
Personally, I am LONG both but I am 4x as LONG PTQ.V relative to VMD.TO