My Q3 Preview: 47% Rev Growth w 150% EBITDA Growth…This is the garbage that just grinds my last gear, Reliq blows up last night putting out absolute garbage just throwing out smoke and numbers out of thin air and there are no analysts on a name like VitalHub to defend the name and as a result VitalHub trades down by association. When the truth couldn’t be farther from the case.
This guilt by association especially down-market cap has to stop, especially when these pumped up garbage names take down one of the few real businesses that are generating positive cashflow like VitalHub and are executing on a preset growth trajectory and doing what they say they are going to do.
CASH DON’T LIE - VitalHub Operating Cashflow Adj Non-Cash Working Capital Balances for 6 months ended June 30, 2019 = $1,036,946
I digress....
With that rant out the way, someone has to bring it back to fundamentals and I will do my part.
Revenue
TARGET: $3,110,020 – This works out to 47% YoY growth and a further 10% QoQ growth which will be driven by further contract wins with their TREAT product offering and the first full clean look at a Q with the Oak Group integrated in the business group.
Organic Growth – They bury this number a bit in their reporting but I think it’s the most critical number to watch. In the last 4Qs the Organic revenue number has gone from $371,289 in Q2 FY18 up to $1,244,008 in Q2 FY19 which works out to 235.05% growth YoY. If you look at the high frequency data it looks even better the last 2Qs with the QoQ Organic growth rate accelerating in Q2 FY19 up to 45.41% up from 33.13% in Q1 FY19. Yes, this number could be lumpy and stabilize or contract given the timing of certain contracts coming online. But having this $1,000,000+ quarterly organic revenue base to grow from going into Q4 and FY20 in front of Nova Scotia roll out is really BULLISH.
Additional Contract Wins - News flow has been nothing but positive all summer but I am going to stick to the news that will have an impact in the Q that will be reported. They had a contract win with their TREAT solution adding St. Josephs continuing care Centre in Sudbury. On a more material impact they have progressed to Phase II of the Toronto Grace Health Facility project in Q3 which will bring in a further $406,000 in software revenue, $276,000 in Support & Professional Services Revenue. Will hit the income statement more in Q4 but should start to see it flowing through in Q3. Full 7 figure contract when fully rolled out. Big contract.
Strata Health Collaboration – Hard to predict revenues here but strategically I don’t think this development has been talked up enough. Piggybacking alongside other health tech platforms to offer a broader suit of offering is the way to go after these larger and larger contracts. Secondly, resource allocation here is critical given the global market they are both targeting, Its one thing to gain traction in your home market but it’s not economic to have a large sales team footprint in all these global markets and combing forces makes so much more sense.
Profitability
TARGET: $777,505 EBITDA – This works out to 150% YoY EBITDA growth and 41% QoQ. Just continue to push more and more revenue through a relatively stable cost base. These highly scalable tech platforms are a thing of beauty.
EPS Positive - This will be the first clean in the last 4Qs that will have no incremental one-time acquisition costs and a clean balance sheet that EBITDA generation will flow right down the income statement and barring any unforeseen one-time adjustments or costs should see EPS positive number. Looking for an 8% operating income margin.
Cashflow Cashflow Cashflow – Asset light business that consume little to no CapEx so all operating cashflow (EBITDA) should flow right down to Free Cashflow. As a result, that cash balance should continue to grow. Gotta love it.
Cash Opex Growth – Over time this cash OpEx number (General & Admin, Sales & Marketing, Research & Development Costs) will grow but they have been very discipline with their growth strategy with revenue growth outpacing cost growth. There could be a little bit of a ramp here going into the end of the year as they ramp up for the Nova Scotia contract and get into Australian market in a bigger way but it should not outpace revenue growth. Operating leverage, it’s a beautiful thing. Just looking at the last 4Qs is a great example of what I am talking about;
Q3 FY18 Cash OpEx - $1,298,842
Q4 FY18 Cash OpEx - $1,476,244
Q1 FY19 Cash OpEx - $1,107,065
Q2 FY19 Cash OpEx - $1,549,989
I am modelling out a number of $1,500,000ish number but could go as high as $2,000,000. I wouldn’t flinch if it ticked higher given the growth that is laid out ahead of them in Q4 and into FY20.
Projecting Out
Q3 should show continued growth but the setup into Q4 and FY20 is what I am really BULLISH on, especially when you consider the Nova Scotia Contract which initially got the stock running in the beginning of the year, the 7 figure contract and entrance into the Australian Market and the recent acquisition of Oculys Health that adds a further $2,000,000 revenue of which $1,560,000 is recurring revenue which adds close to 15 – 20% to their revenue base going into FY20. As an aside, I really liked the acquisition I don’t know why the market yawned at it but I will save that rant for another day. Adds a further 0.04/share in value while only increasing the float by aprox. 5%. So Accretive!!!
All in; I think you can make a conservative case for a $20,000,000 revenue number going into FY20 with balance sheet capacity to add even further to their revenue base through further acquisitions.
Valuation
Keep it simple here on a 170M share count and a $20,000,000 Revenue Base (60/40 Recurring Revenue Split) on a 4x1 Sales multiple and I get to a 0.33/share target price which equates to 120% upside and you get the upside optionality of further acquisitions or further 7 figure contract rollouts for free.
That’s all I got for you today, analysts’ coverage would go such a long way to build a more resilient shareholder base in this name.
Was adding yesterday as it traded down on the back of the Reliq beatdown which was just ridiculous.
LONG w 0.166/share ACB