Description

Premier Health of America is a leading healthcare staffing company in Canada that has grown at an extremely rapid rate over the last five years, predominantly through acquisition; the company generated $12mm in revenues in FY19 and is now on pace to do ~$170mm in revenues.

Last month PHA closed on a transformational acquisition that will nearly double revenues and EBITDA without issuing a single share, and most importantly serves to significantly diversify and de-risk the operating business.  Despite its attractive qualities, this acquisition has thus far been largely ignored by the market, with the share price continuing to languish at depressed levels. Shares are currently trading for only 4.1x EBITDA and 2.9x FCF.  

Interestingly, the person who seems most excited and determined to capitalize on the opportunity post-acquisition is the company’s CFO.  He’s bought shares aggressively on the open market in recent months paying an average price of $0.38 per share.

I believe the business is worth roughly $1.20 per share, which is around 4x the current share price and would put the valuation at 7.2x EBITDA and 12.5x FCF.

The company’s size and liquidity make it more suitable for personal accounts.  Shares trade as PHA on the TSX Venture Exchange in Canada. 

Overview

Premier Health is a leading tech-enabled staffing company in Canada, providing nurses and other healthcare professionals to hospitals, clinics, retirement homes, and other healthcare providers.

The healthcare placement agency industry is extremely fragmented with hundreds of independent operators with little-to-no technology enablement; these are often very small companies that are running their businesses with little more than Excel and a cell phone.  

Premier Health has distinguished themselves in the industry with a significant investment in technology that they are then able to leverage across different geographies and verticals each time they acquire a placement agency.  

They started developing a technology suite in 2011 as they realized they needed it to respond to RFPs quickly in the Quebec market.  The platform has been increasingly built out over time and is now able to optimize and manage all facets of the business (scheduling, assignment, billing, reporting, etc.).  Nurses are other healthcare professionals can specify when and where they want to work using a mobile app, and the platform will automatically match them with placement opportunities that PHA has received via a 24/7 dispatch center.

Premier Health currently operates in two segments of the market: Per Diem / Locum Tenens and Travel Nurse.  Per Diem placements are typically for a single workshift or just a few days.  These shifts are typically assigned at the last minute and pay is tied directly to hours worked.  By contrast Travel Nurse placements are longer, either 1-3 months in duration, or even longer in the case of maternity.  These are temporary short and medium term assignments that require travel and are often in remote areas.

In total the company now operates through six different agencies:

• Placement Premier Soin

  • Per Diem agency in the Quebec market

• Code Bleu

  • Per Diem agency in the Quebec market

• Premier Health Nordik

  • Travel Nurse agency for remote northern communities

• Solutions Nursing

  • Travel Nurse agency for remote areas of Quebec and Nunavut

• Canadian Health Care Agency

  • Travel Nurse agency for indigenous communities in Ontario, Manitoba, Alberta, and Nunavut

• Solutions Staffing

  • Travel Nurse agency in BC, Alberta, Saskatchewan, and the territories

Quebec: Concentration and Concerns

For much of 2021 up until the fall, PHA shares traded in the $1.20 to 1.50 per share range.  With the share price now down 80% from its highs, it begs the question: what happened?

In short, Premier Health had a significant concentration in the province of Quebec – historically it was 95% of revenues – and it was at that point in the fall of 2021 that the provincial government started making commentary about a desire to revamp the healthcare system to reduce its reliance on private agencies.

Public sector nurses were essentially burned out by the pandemic environment and mandatory overtime.  As a result, nurses were increasingly attracted to the flexibility of agency work and left the public system for private agencies like PHA.  The number of agencies in the province ballooned from 30-40 to over 240, although this figure overstates the amount of work that shifted to agencies as most of these competitors are extremely small operations.  Historically agencies have been responsible for 3-4% of the workforce in Quebec and this increased to 5.2% at the height of the pandemic.

The provincial government started introducing temporary directives that pressured FY22 results.  Quebec took various actions like imposing special measures rate restrictions and providing financial incentives to attract nurses back to the public system; they specifically allocated $1 billion in bonuses for nurses if they would commit to working full-time for 1 year.  As a result of these directives, PHA’s EBITDA margins did come under pressure, falling from 8.8% in FY21 to 7.2% in FY22.

All of these government measures had only a temporary impact, however, and the business subsequently rebounded in FY23 with EBITDA margins climbing to 9.0%.  Despite the strong operating performance, the share price remained depressed.  While the province’s temporary directives were no longer pressuring results, the province tabled Bill 10 in February 2023 which posed the potential for new regulations and restrictions on agencies, and more importantly the health minister asserted a goal of eliminating the usage of private agencies by 2026.  As a result, even though the business was rebounding strongly, the share price continued to decline through the first half of 2023.

Bill 10 ended up passing and it empowers the health minister to fully regulate the usage of agencies in the province – imposing restrictions on use, establishing exceptions, imposing wage caps, etc.  With powers in hand, the province is now in the process of operationalizing it and there is certainly a lot of uncertainty as to the precise impact that it will ultimately have on Premier Health.

While the Quebec government has made a lot of bold pronouncements regarding their goals – and a desire to eliminate agency labour in the province is certainly concerning – ultimately it’s an aspirational target, and the goal itself is arguably not very realistic.  As a result, I believe that the market’s concerns regarding the future of the Quebec business have been greatly overblown.

Why do I feel that the future of PHA’s Quebec business is not as dire as the rest of the market seems to fear?  A few things to consider:

• Nordic and northern markets are roughly 25% of PHA’s Quebec business.  These markets are not expected to be impacted by Bill 10.

• The province can impose restrictions on the usage of agency labour, but they ultimately can’t force nurses to return to the public system if they don’t want to.  The province already tried using large one-time financial incentives as a carrot to lure nurses back, but that arguably had a fairly limited, short-term impact.  Polling has suggested that 75% of nurses say they would just leave nursing altogether before they went back to the public system.  While words today may not necessarily line up with actions tomorrow, the polling certainly doesn’t bode well for the government’s goals.

• Agency labour is only 3-4% of the workforce in Quebec, and this is no different from the other provinces in Canada.  It is also not unusual in other industries for agencies to supply similarly small proportions of the workforce in their respective industries, and it is arguably more efficient and desirable to operate this way due to the flexibility that it offers both the employer and employee in such an arrangement.  The Quebec government frames the very existence of agency labour as a problem to be solved, but nowhere else is this even viewed as a problem.

• The province is still doing RFPs and thus far PHA hasn’t seen an impact.

• Premier Health is one of the largest agencies in Quebec with around 25% market share and a significant investment in technology that allows them to operate more efficiently than their competitors.  While smaller competitors will likely struggle to survive in the face of margin pressure, PHA has significant scale in the province and is well positioned to survive and potentially even thrive in the face of new regulations that could serve to pressure margins.

• Imposing wage caps in certain categories and/or geographies is likely to drive a lot of small agencies out of business.  As I mentioned before, the province went from 30-40 agencies to well over 200 during the pandemic.  A lot of these tiny agencies have built their businesses around low volume, high hourly rate work.  If many of the small independent agencies in the province start failing, nurses will likely migrate to larger agencies like PHA.  I think it’s definitely possible that the province might just view a lot of the smaller agencies as predatory in nature and simply wants to drive consolidation in the industry.

While some degree of concern regarding the future of the business in Quebec is certainly warranted, a lot of the strongly worded government pronouncements on the matter sound a lot like empty rhetoric to me.  I suspect that the government will find it extremely difficult, if not impossible, to operationalize Bill 10 in a way that meaningfully reduces agency labour without significantly impairing the province’s ability to provide healthcare services.  I believe that the most likely scenario is that Bill 10 ultimately has no material impact on PHA – I think margins in Quebec will likely come under pressure, but I also expect increased industry regulation to drive consolidation that simultaneously increases PHA’s share of the agency labour market.

Solutions Staffing - A Transformational Acquisition

With the government in Quebec threatening to act irrationally and impair the industry there, Premier Health stayed focused on their goal of further diversifying the business into Ontario and the western provinces.  In April 2022 they got started with the acquisition of CHCA which expanded the business into Ontario, Manitoba, Alberta, and Nunavut.  While CHCA was a good first step and did serve to diversify the business, Premier still had roughly 75% of revenues in Quebec.

In July 2023, however, they finally announced a truly transformational acquisition.  They signed a purchase agreement to acquire Solutions Staffing for $21mm in cash, a transaction that would almost double both revenues and EBITDA and would drastically reduce the company’s dependence on Quebec.  Solutions Staffing is a Travel Nurse agency in BC, Alberta, Saskatchewan, and the territories.  The locations they serve are not quite as remote as what CHCA targets, so they tend to be somewhat longer term placements.

I think for a while the market was frankly skeptical that the company would even be able to close on the transaction because they lacked the necessary cash on the balance sheet, although the combined EBITDA was clearly significant enough to support a larger financing package.

Finally at the end of October the company announced a $50mm credit package that refinanced their existing facilities and provided them with the capital necessary to close on the acquisition.  With capital now in hand, they finally closed on Solutions Staffing in early November.

With shares continuing to languish around $0.30 per share, this acquisition has essentially been ignored by investors.  I think that its significance, however, cannot be understated and I believe that it has resulted in considerable value creation inside of PHA:

• The acquisition increases the revenue base from $90mm last year to around $170mm pro-forma for Solutions Staffing.  I expect EBITDA to more than double from $8.2mm last year to roughly $16.5mm with the acquisition.  They have essentially doubled the size of the business without issuing any equity, and will generate significant FCF which can be used to pay down debt.

• They paid a very low valuation of 3-4x EBITDA for the business

• The acquisition significantly diversifies and derisks the business.  Prior to their diversification efforts Quebec was 95% of revenues and the province is now down to 35-40% of revenues.  More importantly, the portion of the business exposed to the effects of Bill 10 are down to 25-30% of revenues.

• I think that one of the strongest investment setups is when management has very high ownership and is willing to finance a large purchase entirely with debt.  It does not happen often, but when it does in my experience the results are usually very strong.  Management ownership is indeed very high (the CEO owns 39% of the company), the acquisition is very large (with earnouts the $27mm is over 70% greater than the entire market cap), and the company is willing to run fairly high leverage to accomplish it (debt-to-EBITDA is now 3.2x).  

The reason I think this setup tends to correlate with such strong future investment performance is because it’s usually a sign that a) management views the acquisition as very low risk (or they wouldn’t effectively bet the company on it when they have such a large personal ownership position to protect), and b) they view their equity as extremely cheap (and would rather take on increased financial risk from large amounts of high cost debt before they issued shares at current prices).

Ownership

The CEO, Martin Legault, has a very substantial stake in the business as he owns 39% of the shares.  In total, insiders own roughly 50% of the common shares.  With insider ownership so high at the company, I feel that the interests of management and the BOD are very well aligned with other shareholders.

Furthermore, prior to the recent large acquisition, the company was very active in taking advantage of its inexpensive share price to repurchase stock.  In 2022 and 2023, they bought back the full amount of shares allowed under their NCIB – 1.4mm in total – at an average price of $0.36 per share. This significant repurchase activity is particularly bullish IMO when one considers that a) insiders own 50% of the company, b) the purchases were done at prices quite a bit higher than today’s trading level, and c) the purchases were made before the highly attractive Solutions Staffing acquisition was announced.

Finally, since the Solutions Staffing acquisition was announced, there has been significant open market insider buying by Guy D’Aoust, the company’s CFO.  I consider CFO buying to be the most bullish of all insider buys as CFOs are typically a lot more conservative and risk averse than the other insiders.  Since July he has bought 140,000 shares on the open market at an average price of $0.38 per share, which is also significantly above current trading levels. There’s no indication that he’s finished building his position either as he’s made another insider purchase as recently as yesterday.

Valuation

Premier Health generated $90mm in revenues last year and $8.2mm in adj EBITDA.  If you also back out $100k in acquisition-related costs and $300k in share-based compensation, adj EBITDA would’ve been around $8.6mm with an operating margin of 9.6%.

The most recent financials that have been disclosed for Solutions Staffing indicate that in FY22 they did $74mm in revenues and $6.7mm in EBITDA.  I expect that the results for FY24 will have grown somewhat from these historical levels and that the business’ attractive operating margins will be maintained.  

Combined I expect the two businesses to generate roughly $170mm in revenues and $16.5mm in adj EBITDA.

At $0.28 per share the company has a $16mm market cap and post-acquisition I expect the company to have $52mm in net debt (including the full potential $6mm in earnouts tied to Solutions Staffing).  This gives the company an EV of $68mm and puts the EV/adj EBITDA at 4.1x.

In terms of FCF, I am expecting adj EBITDA to be reduced by roughly $1.1mm in lease payments, $3.4mm in capex, $5.2mm in interest expense, and $1.5mm in cash taxes, thus yielding $5.3mm in FCF.  With a market cap of only $16mm that works out to a FCF multiple of only 2.9x.

Risks

In a worst-case scenario, there is a risk that through the power afforded by Bill 10, the Quebec government will be able to regulate agency labour out of existence in the province.  This would have a significant negative impact on EBITDA and FCF.

Regulatory changes in other provinces could potentially imperil the healthcare staffing industry in a similar manner as Quebec.

The company has high debt levels and as a result any weakness in the business will have a leveraged impact on the value of the equity.

Roughly half of the EBITDA of the combined business is being generated from a business that was just acquired and investors have less historical information to rely on and a lesser understanding of the business than if it had already been a publicly reporting entity.  As a result, there is arguably a greater potential that it could fail to perform to expectations.

Management has not shied away from large acquisitions and so there is the potential that they could make another material acquisition in the future that performs poorly, particularly if they enter a new market or jurisdiction like the United States.

Catalyst

Management has transformed the business through its acquisition of Solutions Staffing, but because it closed so recently, they have thus far not had much opportunity to market the new combined company to investors.  As the company has an aggressive growth plan that will likely require future equity issuances, I expect that investment banks will be particularly eager to help market the company to investors in the new year.  With an extremely low valuation and an attractive growth story, I expect investor outreach efforts (potentially including conference presentations, roadshows, quarterly conference calls, etc.) to serve as a catalyst for the stock price.

Every quarter that shows an absence of meaningful negative effects from the impact of Bill 10 will incrementally reduce investor fears that there is an existential threat to their business in the province.

The addition of Solutions Staffing when they report Q1 results should highlight to investors the significant growth, EBITDA and FCF being generated by the business.

Management is likely to continue making acquisitions in the future, and any acquisitions that are consummated at a low valuation and help to further diversify the company away from Quebec are likely to be perceived positively by investors.