Nice beat as core growth shows signs of acceleration
Our view: VMD's 2Q21 exceeded our expectations and the Street's, as new patient setups began to ramp back up, enabling core topline growth to show signs of acceleration and strong margin expansion, returning to historic levels. We maintain our Outperform rating and US$13 PT.
Key points:
A nice bounce-back from the slow start. VMD's 2Q21 reflected solid business trends, with core organic growth of 13% (excl. COVID-related revs), increasing slightly from +12% in 1Q21, enabling an impressive 580 bps of sequential margin expansion to 25.0%. As a result, adj EBITDA came in nicely above expectations at $6.8MM vs. our $5.8MM estimate and consensus of $5.6MM, a solid improvement after last quarter's miss. Mgmt expects 3Q21 core revs of $26.8-27.8MM and $0.5-0.8MM of COVID- related revs (or $27.3-28.6MM total).
Solid growth in patient count. As discussed on last quarter's call, VMD saw a strong improvement after new patient starts dropped off in January and February, which carried through from month to month in 2Q21. Specifically, VMD's ventilator patient count increased 5% sequentially, to 8,103, with many of the new patients coming on late in the quarter as June was its strongest month for new starts since the pandemic, and July increased further - a strong leading indicator for topline growth.
Mgmt remains confident in significantly accelerating topline growth.
VMD has added 28 new sales reps and territories through mid-year, putting it on track for its target of 60 in FY21. With new patient starts continuing to ramp back up and the company capitalizing on underpenetrated markets, mgmt remains confident in core organic growth returning to its target of at least 30% annually, supporting continued strong margin as experienced in 2Q21.
Philips Respironics recall could prove to be a share gain opportunity in the CPAP business. While the recall, which relates to sound abatement foam, has not caused significant issues for the vent industry (because they will not be taken out of service), it has resulted in significant disruption across the CPAP industry given Philips' scale. This situation may cause many under-capitalized operators to fail, while VMD has shifted toward alternative suppliers. As such, the company may be positioned to capitalize on the opportunity presented by this disruption in the interim before Philips returns with a replacement.
Well positioned for external growth opportunities. VMD's leverage remains very low at just 0.2x, with debt representing just 7% of total capital. Recall, the company is evaluating a broad range of potential targets, particularly those that would expand its reach into new geographies or disease states, and has devoted resources to building out M&A and integration capabilities.