Perhaps your best DD is the share price trajectory graph.
I will explain why later in this post.
QHR is in the Electronic Medical Records Business and has succeeded in establishing a strong market position in B.C., Alberta, Saskatchewan, Manitoba and Ontario.
Currently there are approximately 72,000 physicians practicing in Canada .
Of this total market, about 40% of all physicians in Canada currently utilize an EMR product provided by approximately 30 vendors.
The Company now has over 9,000 physician clients in six provinces, with a 32 % market share, making the Company one of the largest EMR vendors in Canada.
Amonst the EMR providers, QHR is in the elite category, being rated #2 overall and is rapildy growing.
It has superb management and its balance sheet is solid, with little debt and robust WC.
Here in Canada Govt mandates that nearly all physicians must convert to EMD by 2016.
QHR is ideally positioned for the strong growth that lies ahead, as the 60 % of physicians not yet converted will have to convert over the next two years or so.
The business itself has little attrition ( mostly Drs who die without selling their practise ).
As well, recurring revenue becomes a very high percentage of total sales, as markets mature.
Now, lets get back to the share price trajectory.
Note that it has been steadily increasing but recently the rate of increase is becoming non-linear .
Heres why.
As revenues grow, Ebitda will grow even faster.
This is partly because there are some fixed costs ( G & A etc ) that become a smaller and smaller percentage of total sales, as those sales grow.
But, in this niche, the main driver is the rate at which recurring sales increase.
Recurring sales are much higher margin than initial sales of hardware and software.
Lets illustrate.
In Q3/13, Sales increased by 22 %.
Recurring sales as a percentage of total sales increased from 67 % in Q3/12 to 76 % in Q3/13.
As a consequence, Ebitda increased 168 % and the Ebitda margins increased from 6.3 % in 2012 to 13.9 % in Q3/13.
So, we have a 13.5 % increase in recurring sales producing a 120 % increase in EBitda margins.
Put it another way.
An absolute 9 % increase in recurring sales produced an absolute 7.6 % increase in the Ebitda margin.
This can be used to forecast Ebitda margins when the Canadian market is mature ( ie nearly all physicians are EMRed ) at which point recurring sales would be at least 95 % of total sales.
The computations are elementary.......Ebitda margins will increase by an absolute amount of 16 % which means that Ebitda margins will then be about 30 % of gross sales ( 13.9 % + 16 % ).
This can be used for valuation estimation.
QHRs runrate is now about $34 million per year.
Assuming it retains its market share ( almost certainly it will increase market share ) , its gross sales will amount to $85 million by 2016 when nearly all physicians will be EMRed ( $35 million times 2.5 ).
Ebitda will then be $25.5 million.
Using a conservative EV/Ebitda multiple of 8, it can be computed that fair valution EV will be $205 million or about $4.25 per share.
With no net debt, this is essentially all market cap......accrued cash by then will be pure gravy.
But, thats not all.
Additionally, the Company has enhanced its competitive position through the formation of its hosting operations.
Hosting simplifies the management of enterprise applications through a fully configurable set of application hosting services and customer support. With state-of-the-art capabilities in hosting small to large scale enterprise application deployments, specifically focused on the Electronic Medical Record and Enterprise Management Solution markets,clients increase their ROI by reducing the amount of up-front cost required for new enterprise software purchases,while improving deployment timelines.
Such cross hosting will develop best of breed, stand-alone modules of its current products that can interface with other companies’ products, thus broadening market reach.
This will also boost margins.
Perhaps more importantly,in late 2012, QHR acquired a US which it now calls its RCM division.
The RCM division is an electronic data interchange (“EDI”) provider which delivers best in class software solutions and transaction processing services including clearing house capabilities that encourage interoperability to assist US Health Care Providers, payers and intermediaries capture and exchange information. Clients include physicians, hospitals, health plans, insurance brokers and state governments.
The EDI software supports processes such as Health Plan enrolment, Health Insurance Eligibility, Health Insurance Claims, Claim Payments and Provider to Provider Collaboration of supporting referral and compliance documentation.
The Company currently has approximately 150 enterprise customers and approximately 5,000 US Medical Physician and Billing Service customers and is continually seeking to increase the number of health care clients it serves.
As such, its RMC division is also ideally situated to capitalize on the $983 billion US Healthcare industry reform movement by applying its business and technical expertise, advanced software technology, and subscription based pricing model through implementing government mandated Health IT standards for information exchange in the “HealthCare Business Chain”.
The Company’s strategy for this division is to:
Leverage QHR’s marketing abilities and initiatives to accelerate the addition of Billing Service customers ( (known as Revenue Cycle Management) by targeting specific doctor specialties
Target EDI Markets through partnership channels who have relationships with Third Party Administrators (4,000 in US), Insurance Brokers/Agents (38500 ) and IT vendors ( 1000 ).
In addition, QHR is in the process of adapting its EMR software for seamless intergration with US requirements.
Currently RMC has annual sales approaching $3 million of which recurring is about 88 %.
As this is in US dollars, and with the C$ expected to decline to 90 cents, margin levels could be very robust indeed.
Put it all together, QHR offers a triple or more from current levels, in a highly predictable manner.
Wild Cards
This is a consolidating sector and there are few low hanging fruit remaining to acquire.
That means consolidation will occur from among the top four which dominate the EMR market.
This could further boost valuations for QHR.