Murphy’s Law in Stocks - Trading <2x EBITDA…I had a long hard look in the mirror this morning, a big cup of coffee looked at my EBITDA estimates one more time than invested my last dollar of cash on the sideline into Premier Health today.
For a company that that is recession proof, asset light & just expanded into Canada’s largest province I would never have thought it would have gotten this cheap.
This is such a no brainer in my opinion if you have an investment timeline of greater than a week and in all likelihood my favourite risk/reward play in the market right now. As the entire company is trading for near the price they paid to acquire the Ontario nursing business in April alone…
Did they get whacked by supply chain shortages within their transport division – YES
Did they get whacked by omnicron eating into billable hours in Q2 – YES
Did they get whacked by labour shortages from Skilled Nursing Demand in Quebec – YES
Did they get whacked by tech infrastructure buildout in advance of Ontario expansion - YES
But you just have to ask yourself two questions.
Are those headwinds transitory? I say they are all transitory with transports coming in Q3, COVID in the rear view mirror, tech infrastructure built out and nursing demand normalizing in a post covid world.
Do any of those headwinds affect the long run profitability of the business? I say no, you can see it in the gross margin of the business which has been stable around the 24-25% margin for the last 5 Qs. Its is not a fundamental business quality issue affecting the unit economics of the business it is a temporarily influx of costs through OpEx on the income statement.
Given we have put those crippling fears in the rear-view mirror lets normalize the business today and see where we are.
Normalized Base business (Pre-Acquisition)
Let’s assume they average 250,000 Billable hours per quarter for an annualized figure of 1M Billable hours at $70-75M in Revenue w 24-25% Gross Margins and 10% EBITDA margins on a normalized run rate.
That gives a range of $16.8 – $18.75M gross profit netting out $7.0-7.5M of EBITDA.
You can put a valuation on that steady state normalized run rate business of 2.60 - 2.75x EBITDA with minimal CapEx needs.
Ontario Expansion
But that is not it, we tucked in a great deal in Ontario in April that added $24.2M in revenue and $3.4M in EBITDA (14% EBITDA margin which is margin accretive as well) paying 3.0 – 4.0x EBITDA depending on cash earnout without adding a single share to the share count.
The stock closed that day up 23% to 0.80/share to reflect that addition of aprox. 35% increase in run rate EBITDA and geographical expansion out of Quebec de-risking the story. (Makes sense I personally thought the stock would of traded even higher).
So I bought, and then bought some more, etc. etc.
Business on a Consolidated Run-Rate Basis
This is where things just get stupid cheap. If we add the $7.25M in EBITDA at the midpoint from the base business to the $3.4M in acquired annualized EBITDA in April that gets me to a run rate level of $10.65M in EBITDA before you even consider any organic growth, costs synergies or further acquisitions.
So, on today’s business this stock is trading 1.85x Normalized EBITDA!!!
Are you kidding me…. How did we get here…
What’s it worth Today
I think an asset light, industry consolidator in a highly fragmented industry with a massive runway for growth with no macro exposure or sensitivity should trade closer to 8-12x EBITDA.
That would equate to a share price range of 1.50 – 2.25/share or 1.88/share at the midpoint which would be a casual 437% upside.
That price target would not have sounded crazy just six months ago that is just how far sentiment has fallen while nothing has changed in the long run prospects of the business or the unit economics.
Sensitivity Analysis
For argument’s sake, let’s say I am wrong on the core business and the long run profitability of the business is actually impaired. Let’s go through some numbers to see how we get such a margin of safety buying the business down at this valuation level.
They just acquired the Ontario business so we start with $3.4M in EBITDA. If we just annualize the Q2 figure which will be the trough Q where everything that could have gone wrong went wrong would be 2M in annual EBITDA for the base business.
That would result in a run rate business of $5.4M EBITDA or a still only a 3.6x EBITDA!!!
If everything possible that could go wrong continues to go wrong you are still at a ridiculously cheap valuation cheaper than what they just paid to tuck in the acquisition in April.
When is a big player going to say enough is enough and just buy this sucker up.
In Conclusion, this is the cheapest I have ever seen one of these asset light, business aggregators with long run compounder potential ever trade at when there is no impairment to the long run prospects of the business.
Just have to look at one number, that gross profit margin figure. Nothing has changed with the long run economics of the business.
This is your fat pitch. SWING!!!
I am ALL IN
EGREGIOUSLY LONG