VIEMED HEALTHCARE -SPN VMD.
February 20, 2018 - 12:21pm EST by
hkup881
2018 2019
Price: 2.50 EPS 0 0
Shares Out. (in M): 38 P/E 6 4
Market Cap (in $M): 95 P/FCF 0 0
Net Debt (in $M): -2 EBIT 0 0
TEV (in $M): 93 TEV/EBIT 0 0

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Description

spin-off?
 
This one checks all the boxes;
 
-Funny distribution ratio of 1 for 10 (check)
 
-Funny corporate structure with a 100% US business, based in Louisiana, listed in Canada as a result of
the spin, but reporting in USD, hence it scans poorly against a market cap in Canadian Dollars
 
-Spun from a dysfunctional failed roll-up parent with accusations of rather nefarious things (check)
 
-No analyst coverage (check)
 
-Spun during the Christmas-New Year’s Holiday when no one was paying attention (check)
 
-Minimal disclosure excluding basic financial disclosure about the business (check)
 
-Set up to trade weak until executive options priced (check)
 
-Management is comprised of founders with substantial equity stakes (check)
 
-Has recently hired an IR firm and is going to hit the road to tell the story to institutional investors
(check)
 
-Is a genuinely amazing business at a mid-single digit earnings multiple when comps trade for a few
times VMD’s multiple, with a slower growth trajectory (check)
 
Viemed (VMD) is a Lafayatte, Lousiana based provider of non-invasive (NIV) home respiratory health
care. The company currently has operations in 24 states serving approximately 12,000 patients. It was
founded in 2006 and has grown from zero to $47 million in 2017 revenue over the past 11 years through
a combination of increased service lines and continued growth in patientsall organic growth.
Viemed’s main business line involves treatment of Chronic Obstructive Pulmonary Disease (COPD)
through the distribution of respiratory equipment in conjunction with continued monitoring of this
equipment in a home setting. By treating patients at the home, instead of at the hospital, it leads to
substantial savings for Medicare and various insurance companies. It also means that the patient can
stay at home and receive treatmentas opposed to having to be moved around, leading to better
patient outcomes.
 
The company has grown very rapidly (frequently 10-15% sequentially each quarter). While VMD is going
to continue adding new states to its network, it is just as focused on adding additional patients into
states where it already has a presencewhich should increase patient to respiratory therapist ratios,
and margins. Based on internal metrics, only 5% of the total addressable market of over 1 million seniors
is receiving appropriate NIV careleading to a huge runway that only grows as boomers age.
 
This is a very simple business, and the slide deck that was just posted to the corporate home page
should give you enough information to understand the business. This posting is more about alerting
people to the fact that this company exists and is having something of a “coming out celebration” on
February 22, than a deep dive into a company that is complex or even in dispute as to valuation or
operating metrics. Rather, this is just a cheap, rapidly growing spin-off. The call on Feb 22 will be the
first time that the company has publicly spoken to shareholders and I expect that this will dramatically
increase the attention on this unique situation.
 
For a bit of back-story, this was a private business that was acquired by Patient Home Monitoring (PHM
CN) in 2015 as part of a leveraged roll-up strategy. Almost immediately, the management team at PHM
got caught up in some unsavory behavior and left PHM, leaving the management of VMD to run their
own business and getting forced to run the much larger business that they were suddenly a part of.
Almost immediately, the management team of VMD realized that they had made a mistake and they
started the almost 2 year process of spinning themselves off, in order to free VMD from the sinking ship
of PHM. Hence, VMD became a public company with no fan-fare and a core shareholder base who
doesn’t know what they own and tend to distrust anything related to PHM.
 
While 2017 numbers are not complete, based on guidance for 46.75 million in revenue and a 25.5%
EBITDA margin (both midpoints of the range), I come to $11.9 million of EBITDA. I then subtract 2.4
million in depreciation and $300k of interest expense to arrive at 9.2 million of pre-tax income. At a 21%
pro-forma tax rate, that gives you $7.3 million of net income. Based on 37.9 million shares and a market
price of CDN 2.50, I get to a market cap of CDN $94.75 million or USD $75.8 million based on a .80 FX
rate. That means the shares today trade at approximately 10 times net income. Cheap, but not
screaming at youhowever, I think you need to still add back a million or so in one-time spin expenses
and whatnot, which gets you to a PE in the 8’s. Keep in mind that in the first 9 months of the year, VMD
had $10.8 million in cash flow from operations and spun out with a net cash balance sheet.
 
I’m much more interested in what 2018 looks like. Based on current revenue growth rates, I don’t see
why they cannot do $65 million in revenue at a 28% EBITDA marginto account for reduced spin
expenses, better absorption of fixed SG&A and better patient density in existing markets. That would
lead to $18.2 million in EBITDA, from which you would deduct about $3 million in depreciation. There
would likely be no interest expense going forward as debt is paid down, hence $15.2 million in pre-tax
income and $12 million in after tax income. Therefore, you’re paying about 6 times current year
earnings. Even then, due to depreciation, the company has not been a tax payer lately and is likely to
pay taxes at a lower than 21% stated rate. I have to think that a business which can earn $12 million on
about $21 million of net capital (32.7m of assets 11.7m of liabilities) is a pretty damn good ROIC
business. Should it trade for 6 times when it’s growing so rapidly? At 20 times, the shares would sport a
CDN $8 share price, or over 3 times higher than today’s price. From there, there’s likely continued
growth upside for many years into the future.
 
Risks: The key risk here is that the US government once again changes the Medicare reimbursement
rates. When this happened in 2015, it led to a drop in revenue and a few quarters of losses until VMD
out-grew the new reimbursement rates. Medicare could always change the reimbursement rates
arbitrarily. Outside of this, the company has a number of regional competitors, but VMD is the only
national player to both distribute equipment and service the equipment for patients. It also seems to be
gaining market share.
 
I can speak more about all of this in the questions section, but I wanted to get this out there so that
people had time to learn the VMD story before the call on the 22nd.
 

 

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.

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