Q4 Preview: Return to Revenue Growth w Strong EBITDA growth…Who would of guessed looking back 12 months, the stabilization of the topline with a return to YoY revenue growth all the while EBITDA margins more than double. Looking at the core number recovery and the stock price it doesn’t quite compute.
Just keep in mind the is a September 31, 2018 year end so it is quite backward looking so the business is even further along then what we see and doesn’t even include recent acquisitions so the business looks even better sitting here in January.
Lets Dig In;
Revenue
TARGET 20.25M REVENUE – With a 6% organic growth rate in patient base in Q3 you should see continued follow through in strong underlying organic growth in its patient base.
On a revenue mix base its all about the continued growth in their higher margin higher growth respiratory resupply setups It has been a key growth driver to both top line and gross margins this year and we should see continued strong growth here. (Q1:35% Growth, Q2: 33% Growth, Q3: 21% Growth).
Given the first acquisition was closed September 18 you wont get much in this Q but their annualized run rate and revenue guide is a good number to go by. On September 18 management guided to run rate in excess of 85M+ Revenue and 15M+ in EBITDA.
If I back out the 4M Revenue and 1M in EBITDA from the acquired business I get to a quarterly run rate business of 20.25M+ in Revenue and 3.5M+ in EBITDA.
Looking at the CAD going under 0.74USD, mid single digit patient growth and a conservative acquisition program I can easily get to double digit revenue growth in 2019!!!
Profitability
TARGET 3.75M EBITDA – This equates to a 18.5% EBITDA margin, I would love to see the gross margin figure to tick back up over to 70% which would be driven by the higher margin respiratory business which gives them a larger margin of error looking down the income statement.
The elephant in the room, Bad Debt Expense. Using VMD.TO is a good guide given they have already reported their September Q3 and saw bad debt expense running at 9.38% of revenue improving 2% YoY. This holds the trend for both PTQ.V and VMD.TO seeing better collection in the past 12 months.
Just a little hesitant given that its PTQ.V Q4 and they could look to clean up A/R going into the new fiscal year. I think this is mitigated by the fact if you listen to their conference call they talk about running a more conservative collection cycle then the peer group.
Management has done a stellar job improving EBITDA margin the last 12 months and I expect that to continue in FY19 and if you look at VMD.TO running 24-26% range I think this is quite manageable. With each 1% improvement in EBITDA is close to a 1M addition to EBITDA. Seeing that they will do 11M in EBITDA in FY18 there is a lot of upside to gross EBITDA figure from the margin front.
Outlook
Management Guidance of 86M+ Revenue and 15M+ in EBITDA before any expected additional revenue generated from organic growth, cross selling and corporate synergies.
The number is a sand bag, I hold to my pre-stated opinion on double digit revenue growth case, all that will just drop straight to the bottom line and drive EBITDA and the holy grail to this story…CASHFLOW GROWTH!!!
Valuation
Using a 90M share count and a 88M Revenue estimate with 17.75M in EBITDA using a 8-10x EBITDA multiple gives me a target price of 1.58 – 1.97/share or 1.78/share at the midpoint which equates to 220% upside from the current share price.
Even if I use Greg Crawford’s base case ex all growth initiatives I still get to a target price 1.50/share… like come on, this is getting ridiculous how cheap it is.
LONG