ALLIED HEALTHCARE INTL INC AHCI
May 12, 2010 - 11:10am EST by
SpocksBrainX
2010 2011
Price: 2.51 EPS $0.24 $0.00
Shares Out. (in M): 45 P/E 10.5x 0.0x
Market Cap (in $M): 114 P/FCF 9.8x 0.0x
Net Debt (in $M): -41 EBIT 0 0
TEV (in $M): 72 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

Description

 
Thesis
AHCI is an asset play and growth company rolled into one.  The asset is the strong balance sheet with 92c in cash (37% of the current cap) and high free cash flow (almost 12m on an 72m adjusted cap excluding cash).  The company's business is mostly recurring, with 3 to 5 year contracts, and the staffing side which has experienced pressure is increasingly becoming a smaller part of the business.   Insider ownership is minimal (2%) and you do have to worry about currency, acquisitions, and a general inability to monitor this business model (business is based in the UK), and management unwilling to buy its own shares despite the free cash flow yield here equalling 16%.       
.
Business
Please see the 2-20-09 GOCANCUCKS97 writeup for this company (price was $1.20 then).   Very little has changed (except the valuation a lot higher) beyond continued strength in homecare with continued weakness in nursing and hospital staffing, though management remains somewhat optimistic on hospital while downright grim on nursing (7% of Q1 revenue).
.
here is a list of positives and negatives
.
POSITIVES
  • 41m in cash on the BS with no debt (in stering)
  • Big free cash flow yield (16% on a trailing basis)
  • Significant portion of business is recurring (3-5 year contracts, though getting granular information on this is very difficult for me at least)
  • Homecare showing good growth (30858-34162-35763-35903-35860 GBP from Q2-09 to Q2-10)
  • Acquisitions could juice growth rate (management has stated in previous calls that they expected something to happen here by 2H of 2010; if not, they will look for other methods to boost shareholder value, though there were no statements like this in the latest call) and the fact that they've talked about it for a while without pulling the trigger might be an encouraging sign that management will be price-sensitive
  • Cheap on a valuation basis
  • in theory, emphasis on homecare as opposed to hospital care could be cheaper in the long-term for those providing healthcare, so there might be a built-in incentive to beef up this business long-term for those with budgetary pressures
NEGATIVES
  • Based in UK - familiarity and exchange rate issues
  • Doesn't pay dividend or buy shares
  • Options pretty high (though cancellations have been high too) at about 3% as a percentage of the diluted share count for past 3 years
  • As currently configured, not much of an operating history (see corporate history listed below)
  • Pressure on Staffing part of business (getting smaller)
  • Fears of pricing pressures for contracts, eps as UK addresses budgetary issues
  • No Moat - see previous canucks posting for discussion of fragmentation of business
A few notes on the business and how AHCI ended up as a UK-based homecare company listed on the Nasdaq
.
 Business
  • 113 branches with 90% coverage of UK
  • Customer is elderly; learning disability
  • Provides domiciliary care, which is personal or basic care
  • 3.9% market share
  • Payors include Local Govt authorities and NHS Primary Care Trust (for HC)
  • Balance of sales is staffing to nursing homes and hospitals
  • CEO is Sandy Young; CFO is Paul Weston
  • Bids are 50% based on price, 50% on quality
  • Home Care is 84%; Establishment at 9%; Hospital at 7%
  • 84% of revenue is recurring on 3 to 5 year agreements
  • Top 6 competitors have less than a 20% share
  • Over 2000 companies competing
 Corporate History
  • Originated in US - mid 90s
  • 1997 - acquired UK companies
  • 2003 - sold US division
  • 2004 - did a secondary and listed on NASDAQ
  • 2005 - established 108 branches by expansion and acquisition
  • 2007 - disposed of Allied Respiratory for 75m and paid down bank debt
  • 2008 - focus on Homecare; entering learning disability and continuing care markets
 
Sales Trends
  • Q1 to 4 for 08, 09: HC: 27-28-29-30-31-31-34-36
  • Pressure has been on Nursing homes and hospital staffing (year 21-17; 16-13)
  • Exchange rate also played havoc - 2.05 in Q1 08 and 1.64 in latest
 Sales Growth Drivers
  • Specialist services (continuing care and learning disabilities)
  • Expand branch network
  • Win contracts (consolidation of suppliers)
  • Acquisitions
  • Focus on quality - currently above market average - aim to be market leader
  • IT updates ongoing
Conclusion
I just think this is still very cheap, enough to overcome valid and important worries regarding currency, competition, the UK as an investment sector, and management's refusal to date to consider dividends or share buybacks. 
.
.
Note:  the price has fluctuated in a wide range lately - 10c since I've been typing this, and $2.30 just a few days ago during the rout.  There is also an unusual 8-k filed lately which could be the precusor to more interest in itself being acquired, though that is pure conjecture at this point.

Catalyst

A good acquisition or dividend/buyback which puts this cash to use.
    show   sort by    
      Back to top