My Q3 Preview: Sequential Rev & EBITDA growth at 2.5x EBITDAEasily my Top Pick going into earnings season and I have put my money where my mouth is as its my largest holding with an ACB of 0.125/share. Greg Crawford and Hardik Mehta have not put a foot wrong since the VMD.TO spin and its time for the stock to get its respect.
I like how Greg is highly motivated to succeed as his interest are aligned with shareholders with him holding 50M share and 12M options or over 10% of the company.
The business has returned to growth. Greg and Hardik put on a clinic on their Q2 conference call in May and the numbers they are guiding to is just amazing;
Conference Call Highlights
- Core organic revenue growth of 4-5% with Respiratory Business (60-70% of Revenues) up 11% YoY with high margin Resupply business up 33% YoY
- FY19 Q3 Revenue Guide of 18.5-19.0M with sequential improvement EBITDA margin improvement with fully scrubbed AR balance with cash cycle running better the DME industry standard
- Annualized EBTDA margin target for end of FY18 of 18% expanding to 18-22% for FY19 with bad debt reduction to 9-10% of revenues target
- Increases to select fee schedule items for reimbursement for the back half of 2018
Revenue
Target: 19.0M Revenue
Given that the respiratory business which represents two thirds of the business is growing double digits I think they should be able to continue to put up sequential revenue growth. FX headwinds should start to abate and turn into tailwinds into Q4 and the start of FY19 as the USD strengthens relative to the CAD.
Under the hood should keep an eye on a couple KPI's. Patients Serviced (43k-45), Equipment Setups (60k-62K) and Respiratory Resupply Setups (10k-10.5K). The latter being the key as that is where the high margin revenue growth can come from on a go forward basis.
Profitability
Target: 2.6M EBITDA
If Hardeek is even half right on his exit FY18 EBITDA margin of 18% we should continue to see QoQ EBITDA margin expansion as revenue mix continues to improve and shift to higher margin elements of the respiratory division and they drive operational efficiencies as they continue to dial in the business post VMD.TO spin.
Key to remember this is only their second clean Q post spin, you have to believe there is a business re-optimization going on. (Personally, I believe that this is a big reason it trades at a ridiculous 2.5x EBITDA multiple, Q3 report just another step in the right direction)
The realignment of the supply chain and distribution centres that have been a topic of conversation once they reach a higher revenue run rate would be a big driver for margins going forward. (If they close one of those 15-30M acquisitions they are talking about this process will just be accelerated but not necessary for the stock to work)
The Scrubbed AR balance is key here. Takes that elevated Bad Debt charge off the table.
Outlook
Target: 82M Revenue w 16.4M EBITDA for FY2019
Might not get an official FY2019 guide from management but given they have a September YE we are 2 months away from the 2019 fiscal year.
With a 4-5% core organic growth rate in Q2 I think that number could be real conservative. You could have flat organic growth and just have the USD/CAD stay >1.30 and still put up that 82M revenue figure!!!
I am going to trust Hardeek here and take the midpoint of his FY19 EBITDA margin range at 20%. The multiple expansion you would see if he is right on that figure would be huge. That is where multi baggers come from, combined jolt of EBITDA growth and valuation expansion.
Any further discussion on targeted acquisitions would just be gravy, Greg and Hardeek seem very disciplined capital allocators and are only going to pursue deals that make sense strategically and can be closed at the right price.
Their patience so far has been a great example of that as valuations in the private space have continued to increase. (Another example why the PHM.V valuation makes no sense when you are seeing valuations rise across the specturm in the DME space!!!)
Valuation
The Beacon analyst is using a 12x EBITDA FY19 multiple, I think that is pushing the upside a little too much.
I am going to be a little more conservative and use a 8-10x EBITDA multiple target which on my 16.4M EBITDA target equates to a range of 0.35-0.43/share or 0.39/share at the midpoint which would be 250% upside!!!
Post Fiscal Q2 in May the stock traded up to 0.15/share on massive volume and has traded back down as no one has been looking. I am hoping and think it is possible we could see a vol surge and interest come back into the name in the fortnight leading into the Q3 print.
You can try to be cute and add the day before earnings but I really don’t think you will be able to rush in at 0.11/share the day before earnings as interest will come back to the name.
Just my thoughts….
FULLY LOADED. LONG