Description

I. Executive Summary

Nova Leap Health is a consolidator of an extremely fragmented space of home care and home health care agencies. Nova Leap buys them at ~5x EBITDA and subsequently improves EBITDA margin. As the company scales its operations, the operating leverage would lead to margin expansion. The stock price has an upside of ~100% in 3 years.

Please note that all numbers are in USD except for share price which is in CAD.

II. Why Does This Opportunity Exist?

There are several reasons why this opportunity exists:

(1) Small cap (~C$16M)

(2) No sellside coverage

(3) Very under radar among buysiders (no investment pitches on major investment buyside websites)

(4) Canadian listing.

III. Capital Structure

Below is a detailed breakdown of Nova Leap’s capital structure.

Nova Leap has ~$5.3M of debt and ~$2.7M of cash.

IV. What Does NLH Do?

1. Business Description and Services Provided

NLH is home care and home health care services company operating in Vermont, New Hampshire, Massachusetts, Rhode Island, Oklahoma, Ohio, and Nova Scotia. NLH all entered into all these markets (except for Ohio) through M&A transactions.

Home care covers such activities as:

Dementia care
Personal grooming like bathing or getting dressed
Moving around: getting in and out of the bed/shower
Medication reminders
Errands like grocery shopping and picking up prescriptions
Light housekeeping
Meal preparation.

Home healthcare covers such activities as:

Skilled nursing
At-home physical therapy
Pain Management
Caring for wounds
Prescription management.

2. Customer Valuer Proposition

The home care and home healthcare enable senior citizens to stay at their homes even after they cannot live there completely on their own. Thus, home care delays the moment when a senior citizen needs to move to a nursing facility.

3. COVID-19 Is a Tailwind

Senior citizens living at nursing facilities suffered greatly from COVID-19. There were instances where a big part of a nursing home’s population got infected by COVID-19. Second, many senior citizens got locked down at nursing facilities and were not able to see family members for very extended periods of time for safety reasons. Needless to say, that was a real hardship.

Thus, I expect that both senior citizens and their families (e.g., children) would be trying to avoid or at least delay moving to a nursing facility as long as possible which would provide strong tailwinds for home care industry and Nova Leap.

4. Payor Mix

Nova Leap payor mix includes out-of-pocket, long-term care insurance, and VA insurance.

V. M&A Strategy

1. M&A Criteria

Nova Leap has the following acquisition criteria:

U.S. and Canada geographic focus
Positive EBITDA with strong reputation/brand
Normally 5+ year history
Opportunities for operational synergies
$1M-$15M of Revenues

Nova Leap is going after targets that are too small for private equity players and as a result faces limited competition. The space is very fragmented, and Nova Leap has many potential acquisition targets in front of it.

2. M&A History

So far Nova Leap has completed 11 acquisitions. See the detailed breakdown below.

The median and average EV/Revenue acquisition multiples are ~0.6x and 0.75x respectively. NLH generally has paid a multiple of ~4.5x EV/EBITDA. However, EBITDA was not disclosed for all transactions so that multiple can be a bit misleading.

Nova Leap pays for acquisitions with a mix of cash, seller financing, and bank loans that are generally amortizing. Over the past several years the average equity component was ~25%.

VI. M&A Playbook and Integration

Nova Leap buys home care businesses that are primarily private pay. After that Nova Leap makes incremental changes at the acquired operations.

First, Nova Leap implements price increases where it is appropriate.

Second, Nova Leap reducea overtime because overtime destroys gross profit margin.

Third, Nova Leap consolidates the back-office functions such as accounting. For example, instead of an accountant looking after one agency, such account working at Nova Leap HQ would be looking after 3 or 4 home care agencies.

Fourth, better scheduling using scheduling software.

VII. Operating Philosophy

CEO Chris Dobbin runs Nova Leap in a very decentralized fashion. Most locations’ leaders have lots of autonomy. HQ are responsible for setting up standards and back office / accounting. Chris Dobbin spends his time heavily on M&A and overseeing the agencies’ leaders.

VIII. Unit Economics

The key operating drivers are the number of client service hours and revenue per hour. Revenue per hour has been quite stable and is ~$25.

Cost per hour has also been stable: ~$16.50 - $17.00.

Thus, the profit per hour is ~$8.50 to $9.

IX. Four-Wall Economics and Four-Wall EBITDA

“Four-wall EBITDA” is of course a misnomer because there are no tangible walls to speak of, but the concept still applies. I want to analyze profitability of field operations first and then overlay HQ expenses on top of that. The key issue that Nova Leap is facing today is its small size of field operations vs. HQ. However, with a few more acquisitions and de minimis growth in HQ expenses (see more on this below), the operating leverage would kick in and lead to a disproportionate increase in EBITDA.

In 2019 segment EBITDA margin (e.g., before HQ costs) was 11.88%. However, in 1Q 2020 and 2Q 2020 it was 10.91% and 10.39% respectively due to the COVID-19 impact.

Revenue run-rate (ex-COVID-19) is ~$5M per quarter or ~$20M per year. With ~12% segment EBITDA margin, NLH should be able to generate ~~$2.4M of segment EBITDA. With the EV of ~$19M, the EV/Segment EBITDA is ~7.85x.

X. HQ Operations

The HQ team based in Halifax is small and includes CEO, CFO, controller, and business development person. This is purely corporate function.

The HQ also has 5 accountants. However, they work with field agencies.

Nova Leap wants to do 4 to 6 M&A transactions a year (there was zero during COVID-19 pandemic so 2020 number would probably be lower than this target). Doing these M&A transactions will not require hiring any more HQ personnel. However, Nova Leap would probably need to hire an accountant for every 3-4 acquisitions (maybe 5).

HQ expenses are ~$280K - $300K per quarter when there are no M&A transactions. Let’s call it $1.2M per year.

XI. Scaling

What the numbers above is mean is that Nova Leap needs to get another $1M of EBITDA to show the strength of its operating model. That would probably require $5M of capital. I expect that it will be done with a very small dilution to existing shareholders.

XII. Valuation and Upside Potential

As I alluded above, current headline multiple of EBITDA is not particularly attractive. However, with getting more scale and proving the model, I would not be surprised if Nova Leap trades at 12x – 14x EBIDA in a few years (2-3 years) which would generate ~80% to 100% upside.

XIII. Risks

M&A Integration

M&A integration risks are inherent for any roll up / consolidation strategy and NLH is not exception.

2. Leverage

NLH has ~$5.3M of debt which is a lot given its EBITDA today. If NLH does not grow its EBITDA, its leverage can become an issue.

XIV. Catalysts

1. Continuous M&A

2. Operating leverage showing up as the company continues to scale its operations.

Disclaimer

Presented recommendation and analysis is an opinion of the author. The author and / or affiliated entities are long NLH shares. Various factors may influence or factor into the analysis or the opinion. The author does not assume any obligation to update the analysis or recommendation.

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