Imposing wage caps in certain categories and/or geographies is likely to drive a lot of small agencies out of business. As I mentioned before, the province went from 30-40 agencies to well over 200 during the pandemic. A lot of these tiny agencies have built their businesses around low volume, high hourly rate work. If many of the small independent agencies in the province start failing, nurses will likely migrate to larger agencies like PHA. I think it’s definitely possible that the province might just view a lot of the smaller agencies as predatory in nature and simply wants to drive consolidation in the industry.
While some degree of concern regarding the future of the business in Quebec is certainly warranted, a lot of the strongly worded government pronouncements on the matter sound a lot like empty rhetoric to me. I suspect that the government will find it extremely difficult, if not impossible, to operationalize Bill 10 in a way that meaningfully reduces agency labour without significantly impairing the province’s ability to provide healthcare services. I believe that the most likely scenario is that Bill 10 ultimately has no material impact on PHA – I think margins in Quebec will likely come under pressure, but I also expect increased industry regulation to drive consolidation that simultaneously increases PHA’s share of the agency labour market.
Solutions Staffing - A Transformational Acquisition
With the government in Quebec threatening to act irrationally and impair the industry there, Premier Health stayed focused on their goal of further diversifying the business into Ontario and the western provinces. In April 2022 they got started with the acquisition of CHCA which expanded the business into Ontario, Manitoba, Alberta, and Nunavut. While CHCA was a good first step and did serve to diversify the business, Premier still had roughly 75% of revenues in Quebec.
In July 2023, however, they finally announced a truly transformational acquisition. They signed a purchase agreement to acquire Solutions Staffing for $21mm in cash, a transaction that would almost double both revenues and EBITDA and would drastically reduce the company’s dependence on Quebec. Solutions Staffing is a Travel Nurse agency in BC, Alberta, Saskatchewan, and the territories. The locations they serve are not quite as remote as what CHCA targets, so they tend to be somewhat longer term placements.
I think for a while the market was frankly skeptical that the company would even be able to close on the transaction because they lacked the necessary cash on the balance sheet, although the combined EBITDA was clearly significant enough to support a larger financing package.
Finally at the end of October the company announced a $50mm credit package that refinanced their existing facilities and provided them with the capital necessary to close on the acquisition. With capital now in hand, they finally closed on Solutions Staffing in early November.
With shares continuing to languish around $0.30 per share, this acquisition has essentially been ignored by investors. I think that its significance, however, cannot be understated and I believe that it has resulted in considerable value creation inside of PHA:
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The acquisition increases the revenue base from $90mm last year to around $170mm pro-forma for Solutions Staffing. I expect EBITDA to more than double from $8.2mm last year to roughly $16.5mm with the acquisition. They have essentially doubled the size of the business without issuing any equity, and will generate significant FCF which can be used to pay down debt.
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I think that one of the strongest investment setups is when management has very high ownership and is willing to finance a large purchase entirely with debt. It does not happen often, but when it does in my experience the results are usually very strong. Management ownership is indeed very high (the CEO owns 39% of the company), the acquisition is very large (with earnouts the $27mm is over 70% greater than the entire market cap), and the company is willing to run fairly high leverage to accomplish it (debt-to-EBITDA is now 3.2x).
The reason I think this setup tends to correlate with such strong future investment performance is because it’s usually a sign that a) management views the acquisition as very low risk (or they wouldn’t effectively bet the company on it when they have such a large personal ownership position to protect), and b) they view their equity as extremely cheap (and would rather take on increased financial risk from large amounts of high cost debt before they issued shares at current prices).
Ownership
The CEO, Martin Legault, has a very substantial stake in the business as he owns 39% of the shares. In total, insiders own roughly 50% of the common shares. With insider ownership so high at the company, I feel that the interests of management and the BOD are very well aligned with other shareholders.
Furthermore, prior to the recent large acquisition, the company was very active in taking advantage of its inexpensive share price to repurchase stock. In 2022 and 2023, they bought back the full amount of shares allowed under their NCIB – 1.4mm in total – at an average price of $0.36 per share. This significant repurchase activity is particularly bullish IMO when one considers that a) insiders own 50% of the company, b) the purchases were done at prices quite a bit higher than today’s trading level, and c) the purchases were made before the highly attractive Solutions Staffing acquisition was announced.
Finally, since the Solutions Staffing acquisition was announced, there has been significant open market insider buying by Guy D’Aoust, the company’s CFO. I consider CFO buying to be the most bullish of all insider buys as CFOs are typically a lot more conservative and risk averse than the other insiders. Since July he has bought 140,000 shares on the open market at an average price of $0.38 per share, which is also significantly above current trading levels. There’s no indication that he’s finished building his position either as he’s made another insider purchase as recently as yesterday.
Valuation
Premier Health generated $90mm in revenues last year and $8.2mm in adj EBITDA. If you also back out $100k in acquisition-related costs and $300k in share-based compensation, adj EBITDA would’ve been around $8.6mm with an operating margin of 9.6%.
The most recent financials that have been disclosed for Solutions Staffing indicate that in FY22 they did $74mm in revenues and $6.7mm in EBITDA. I expect that the results for FY24 will have grown somewhat from these historical levels and that the business’ attractive operating margins will be maintained.
Combined I expect the two businesses to generate roughly $170mm in revenues and $16.5mm in adj EBITDA.
At $0.28 per share the company has a $16mm market cap and post-acquisition I expect the company to have $52mm in net debt (including the full potential $6mm in earnouts tied to Solutions Staffing). This gives the company an EV of $68mm and puts the EV/adj EBITDA at 4.1x.
In terms of FCF, I am expecting adj EBITDA to be reduced by roughly $1.1mm in lease payments, $3.4mm in capex, $5.2mm in interest expense, and $1.5mm in cash taxes, thus yielding $5.3mm in FCF. With a market cap of only $16mm that works out to a FCF multiple of only 2.9x.
Risks
In a worst-case scenario, there is a risk that through the power afforded by Bill 10, the Quebec government will be able to regulate agency labour out of existence in the province. This would have a significant negative impact on EBITDA and FCF.
Regulatory changes in other provinces could potentially imperil the healthcare staffing industry in a similar manner as Quebec.
The company has high debt levels and as a result any weakness in the business will have a leveraged impact on the value of the equity.
Roughly half of the EBITDA of the combined business is being generated from a business that was just acquired and investors have less historical information to rely on and a lesser understanding of the business than if it had already been a publicly reporting entity. As a result, there is arguably a greater potential that it could fail to perform to expectations.
Management has not shied away from large acquisitions and so there is the potential that they could make another material acquisition in the future that performs poorly, particularly if they enter a new market or jurisdiction like the United States.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Management has transformed the business through its acquisition of Solutions Staffing, but because it closed so recently, they have thus far not had much opportunity to market the new combined company to investors. As the company has an aggressive growth plan that will likely require future equity issuances, I expect that investment banks will be particularly eager to help market the company to investors in the new year. With an extremely low valuation and an attractive growth story, I expect investor outreach efforts (potentially including conference presentations, roadshows, quarterly conference calls, etc.) to serve as a catalyst for the stock price.
Every quarter that shows an absence of meaningful negative effects from the impact of Bill 10 will incrementally reduce investor fears that there is an existential threat to their business in the province.
The addition of Solutions Staffing when they report Q1 results should highlight to investors the significant growth, EBITDA and FCF being generated by the business.
Management is likely to continue making acquisitions in the future, and any acquisitions that are consummated at a low valuation and help to further diversify the company away from Quebec are likely to be perceived positively by investors.
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