Quipt Home Medical Corp. (QIPT)
Initiating Coverage with a Buy Rating and $7.50 PT
We are initiating coverage of Quipt Home Medical at Buy with a $7.50 PT. Quipt (PKA Protech Home Medical) is a provider of home medical equipment (HME) focused on the faster growing category of home respiratory products. The company currently has 62 locations across 16 states serving a network of more than 19,000 referring physicians and ~150,000 active patients. In a nearly $60B market that is growing more than 5% and highly fragmented, QIPT has established a 3-year revenue CAGR of 26% comprised of a disciplined M&A strategy and high-single digit organic growth. The company's 3-5 year objective calls for a similar trend line to reach $250+M in revenue and a 25%+ EBITDA margin.
Accelerating market growth. HME expenditures increased at a 10-year CAGR of 5% through 2018 and are expected to expand to 6.3% 2018-2028 (CMS). An aging population and a concomitant increase in chronic health conditions, technology supporting more in-home care, and individual preference are all market growth drivers.
Benign reimbursement outlook. Until last year, the Medicare Competitive Bidding Program (CBP) had driven down Medicare reimbursement rates for several years. CMS elected to discontinue CBP beginning in 2021, and the Medicare rate outlook is now expected to be stable through 2024.
Higher growth, recurring revenue segments. Respiratory therapy products and services are nearly 80% of Quipt’s book, which the company believes has a high-single digit market growth profile. About 75% of revenue is recurring through a combination of rental and resupply revenue.
Leverageable technology platform. QIPT has built an end-to-end technology platform that streamlines the order process from warehousing and delivery to patient onboarding and revenue cycle management. Higher efficiency enables a more price competitive offering, and the value-add services can expand the level of business with each referral source. The platform is also key to QIPT’s ability to effectively integrate acquisitions.
Proven M&A strategy. In this highly fragmented industry, M&A has been and is expected to remain Quipt’s largest growth component. In F2021, Quipt completed 10 transactions adding total revenues of $46.8M with Adj EBITDA of $9.4M, accelerating the 2018-2020 pace. With nearly $55M of available liquidity, Quipt is positioned to pursue more and larger deals going forward.
Valuation. QIPT currently sells at a discount to the median valuation of a peer group of slower growing HME and services companies. At our PT of $7.50, CY 2002 EV/EBITDA would be 8.1x, about in line with the peer group.