Looking Back to Predict the Future...As the noise and eyeballs fade away from the Protech story its key to remember what we got here. Going back through the conference call and press releases made me add back to my position yesterday down here 0.125 – 0.13 and here was my takeaway;
1) Organic Growth can grow 8-10% from this level without adding incremental patient acquisition costs. (With a 70% gross margin that is an incremental 5% to gross margins… now you can see how they can get to a FY19 22% EBITDA margin)
2) Acquisitions under consideration 2 before YE are tuckins in nature and will provide immediate value. (The name will move aggressively on the first deal as so many people are waiting to see capital allocation)
3) Revenues will continue to be up QoQ equates to >20M. (Upside here in organic growth and currency is a double kicker)
4) Cash collection rate at all time highs w YTD Bad Debt Expense of 9.86% with still room for improvement with no big write-down projected in Q4 for YE. (Management of bad debt is a direct pull through to EBITDA margins and has accounted for the majority of EBITDA gains from spin, has made the biggest difference in fundamental recovery)
5) “Continue to increase and exceed Adj EBITDA margins” (The pace at which EBITDA margins have recovered has even surprised management, who knows how high they could get it a year from now)
6) Geographical Footprint of 13 States with expansion identified in state and state expansion, effectiveness of entering a new state is better done through acquisition. (Growing organically instate and acquisition for state expansion gives them multiple pathways from growth and cross selling will be critical as they expand)
7) Hardik discussion on growth in respiratory resupply products and talking about product line as a ‘recurring revenue’ business that continues to grow with set ups strong for FY19 (I hear the term recurring revenue and I just think multiple expansion)
A company that will generate 12M in EBITDA next year at a multiple <4x makes no sense to me with a peer group trading up to 12x EBIDTA. Granted it will be a show me story still, with acquisition execution and strong cashflow generation being the next steps.
What could and Acquisition Look Like?
If you look at old PHM at the multiples and style of tuck in deals that would make a lot of sense for Proetch I refer you to April 7, 2016 press release.
Acquired 1.5M in EBITDA and 5.5M in Revenues for 2.6M. (So they paid 1.7x EBITDA and 0.5x Sales)
Even with Protech at its ridiculous 4x EBITDA multiple these small tuck ins would be highly accretive and could be funded without equity dilution. You could add >10% of value on an EBITDA basis by only spending 2.5M dollars, you do that a couple times, a couple tuck in deals start to add up!!!
If they prove they can identify, close and integrate these type of smaller tuck in deals the multiple will re rate higher making each individual deal more accretive on a go forward basis.
The torque to the upside when they announce a deal is significant and I don’t want to be chasing it higher hence I continue to stay long the name.