With the recently announced Michigan contract award, EBITDA should hit a $25mm run rate by mid Summer. That would put the stock at less than 4x cash flow. Given the minimal cap ex required in the business, cash flow is basically free cash flow. It is extremely rare to see a 25% free cash flow yield for a company that is not highly leveraged or facing serious headwinds in their business outlook.
ASGR was recently selected by the State of Michigan for a major contract award. CMS had held the contract previously.
In January 2008, CMS was sold to Chicago private equity shop Beeken, Petty, O'Keefe in January 2008. BPK had been a minority investor in CMS along with majority owner Madison Dearborn. We believe CMS is carrying a significant amount of debt and is now facing a sharp drop in cash flow due to the loss of the Michigan contract. I can't be sure, but it seems likely that CMS could be facing a financial restructuring, given the expected drop in cash flow. Furthermore, CMS contracts with Indiana, Maryland and Idaho are coming up for rebid in the coming months. With its net cash position ASGR should be in a strong position to benefit from a higher win rate as governments may shy away from CMS's allegedly precarious financial position. CMS's protest of the ASGR's Michigan award certainly won't endear them to other government Board's either.
- industry secular growth opportunities to accelerate?
Luke has indicated a private industry penetration rate of about 20%. Given the budgetary constraints facing municipalities and states these days, ASGR and the industry should have an excellent chance to increase their share of outsourced healthcare services going forward. Success in this area would likely attract growth managers and drive a dramatic mulitple expansion.
-Industry consolidation?
It's hard to say how this plays out. There was talk this past summer of "low ball" approaches from Valitas,(the new corporate name for CMS) that went nowhere. The buyback was then reinstated as expected by Luke. Strategically, the combination is compelling. I just don't know the willingness or ability of Beacon, Petty, O'Keefe to pump more money into the industry after having overpaid for CMS.
Except for its micro-cap status, ASGR has everything investors would want in the current recessionary environment. Cash, no debt and growing revenues and profits. One would expect that as the noise associated with year end redemptions and liquidations fade, this stock could be rerated 50% higher. At $16, the stock would still be below 6x cash flow. This assumes no new contract wins.
Risks-
Michigan award overturned (unlikely in my view).- in which case knock $8mm off my ebitda estimate.
Management change - CEO Catalano announced his resignation on Sep 15. He is being replaced by COO Richard Hallworth in a move that seems to have been in the works for a while. He also announced he was stepping down as Chairman, which did concern me somewhat. Since the announcement, financial and contract news has been good; lessening the risk that the departure was related to some unrevealed problem.
Mgt. decides to use its strong balance sheet to overpay for CMS.