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 you—however, 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 margin—to 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
