Description
Investment Thesis
PRGX Global (“PRGX”) is an audit recovery services company based in Atlanta. The old Profit Recovery Group. This is a quick writeup as the opportunity is possibly short lived. Blum Capital and Weintraub are selling most of their holdings tonight in a secondary offering through Baird and William Blair, offering 3.75mm shares, while the company is offering 2.5mm shares. Stock is off nearly 30% since shelf announcement and secondary commencement. I believe this offers an excellent opportunity to go long PRGX as the business is doing quite well, management has done an enviable job in turning around the business and cutting costs and this large overhang will be finally lifted to allow the stock to achieve a reasonable multiple, yielding $11-13/share in value, or 80-110% upside.
Offering
At long last, PRGX filed a S-3 to register the shares of Blum and Weintraub, who recapped PRGX in 05 with bridge financing, bought stock from Howard Schultz, the founder, in 2002 and have been involved for many years. This has not been a profitable investment best I can tell, and perhaps Blum is winding down part or all of its fund as holdings have decreased dramatically this year. Regardless, their large ownership was a cloud in my opinion rather than activist force as they have been involved as large investors and at the board level for 6 years. The company has turned around and I believe they have decided to exit through the secondary for liquidity vs any business issues.
My only gripe about the secondary is the company is selling 2.5mm shares for roughly $14-15mm in proceeds, for what purpose I don’t know yet. The balance sheet is in fine shape so I can only assume an acquisition is in the hopper. The company has a long history of integrating mom & pop acquisitions to enhance or begin new verticals.
The offering will improve liquidity and offers investors to enter at a very attractive multiple of 4x ev/ebitda and 8% FCF yield.
Business
Two main businesses: Audit Recovery services for retail and commercial clients, and the new Healthcare Claims Recovery Audit services. PRGX is in the business of optimizing profits for customers and finding lost revenue or overspending. The company has really enhanced and streamlined its data mining platform across all industry segments and offices, boosting productivity and efficiency. The company has billions of transaction data records, has now saved and cleansed the data, allowing it to possibly be resold back to clients to further optimize vendor relationships and pricing agreements. This is a possible new growth area management is studying.
Clients give PRGX their budget data and PRGX sifts through it to find possible overpayments to suppliers or underpayments from customers, and then files claims and gets a % cut. Retailers were a majority of this business for decades until recently, but still make up 50%+ of revenue as PRGX works with 23 of the top 30 global retailers. PRGX moved almost 70% of their claims research to India, saving the company nearly $10mm annually.
The US business EBITDA in AR is up 9% YoY and doing quite well. It is ? of revenue and ¾ of Audit recovery revenue. Revenues are up almost 6% YoY YTD. Margins continue to increase much faster as nearly 20% of revenue coming for low cost India centers and that will double again next year.
Europe/Asia was off 18.4% YoY due to both Europe softness and two large client contract timing issues. Claims processing, new client implementations and foreign exchange are all headwinds currently, with revenues off 9% YoY in this segment.
The Healthcare business continues to grow, with revenue up 22% YoY and EBITDA up 19% YoY, and a 3rd Medicaid contract was just awarded. This is their fastest growing segment and now represents 16% of total revenue up from nearly zero 5 years ago. Auditing medical spend for Medicaid contracts of the government will only grow from here, especially under further Obama-care.
Company is really focused on margins in AR and getting growth back on track to high single digits as a whole and EBIT margins in mid teens. Total revenues YTD are up 3.6% on a constant dollar basis and 1.4% not adjusted for currency exchange rates, which has hurt $5mm this year so far.
Management continues to reiterate guidance to grow EBITDA to $40-45mm by 2014, from $21mm in 2010. So far, they are on track if not ahead of plan. 3Q EBITDA was $8.8mm, the highest in 5 years. Management stated on 3Q call that the core AR business alone may generate $40mm+ in annual EBITDA by end of 2014, not including Healthcare segment.
Balance sheet/Liquidity
Cash of $20mm and $6.8mm of bank debt outstanding. No balance on revolver. Working capital was $21mm as of 9/30.
CFFO through 9/30 before working capital was $18mm and capex of $5.7mm. Managment expects $16-17mm of FCF this year, over 10% on market cap and 12% on enterprise value.
Valuation
Shares outstanding: 25.4mm
Price: $6.20
Market cap: $158mm
Net Cash: $13.2mm
Enterprise Value: $145mm
2012 EBITDA: $32mm
2013 EBITDA: $37mm
2014 EBITDA: $42mm
2012 EV/EBITDA: 4.53x
2013 EV/EBITDA: 3.92x
2014 EV/EBITDA: 3.45x
Estimated 2014 FCF if guidance of $45mm hit: $28mm
2014 FCF yield 18%
8% 2014 FCF yield would be $13 stock, or 110% upside.
Stock was performing very well prior to S3 and this secondary announcement. I believe this drop is temporary to absorb this offering and lift overhang.
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.
Catalyst
- Boost in share liquidity after offering completion
- Strong margin enhancement continues as businesses is moved to India and new client growth continues globally and in Healthcare segment
- Market appreciates strong top and bottom line growth and awards company a reasonable multiple for the leading audit recovery services company in the world