Patient Home Monitoring (PHM-V): Recent Sell-Off Presents Investors An Intriguing Opportunity
PHM is an acquisition focused company, growing by acquiring US based home-monitoring companies, for patients with chronic illnesses where the information is relayed to the physician automatically, without costly and difficult traveling. It also is an aggressive cross-seller between the product lines, acquiring specialty companies that do Coumadin (warfarin) monitoring, where the patients might have diabetes that the company has other companies under its umbrella that can provide monitoring equipment ( Source).
With a rapidly aging population, and serious concerns about run-away medical costs in North America, PHM's addressable market is large and growing. Healthcare companies are looking for ways to reduce their costs, and are shifting focus to home-based care, where monitoring is vital to successful maintenance and treatment. Their product lines also decrease the time and inconvenience for patients who can be monitored at home, and avoid long lines and expensive travel arrangements, giving the chronically ill and other patients better quality of life.
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Note: Please note that the company is much more liquid on the Canadian exchange, and reports in Canadian dollars, which is how each company's numbers are reported unless otherwise stated.
BusinessThere are over 10,000 companies targeting the niche home-based services business for chronically ill patients, with a market size of $250B. Patient Home Monitoring is looking to amalgamate those with revenues between $5 and $75 million, with positive EBITDA and FCF.
Organic revenue in the existing product and company portfolio is expected to continue to grow, with cross-selling opportunities added on top of already strong business track-records. They also have dozens of candidates in their pipeline of acquisition targets. The targeted companies also typically only offer one service to their patient data base; where chronic illness suffers typically have more than one illness requiring monitor, enabling strong cross-selling opportunities in new businesses.
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With $56M in cash and annual revenues projected to be $200M+ by the end of 2015, PHM is in a strong financial position for such a small company. Their next acquisition to close should add $62M in annual revenues, with targeted companies mainly in all cash; management has stated they will be reluctant to issue equity, except to keep talented management teams through new acquisitions. Their growth targets are listed below:
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As the company suggests they are a "profitable" company, in the sense that their operations are generating cash flow, and are profitable, as seen in their latest filings:
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The issue is that later on they are unable to post actual profits on the corporate level due to financing activities, which has caused some losses from derivative financial liabilities of $4M in the most recent quarter on $13M of revenue. This has been causing some poor numbers to be posted as company, but there costs are mainly to account for the costs associated with the convertible nature of the companies debentures, and here we will focus mainly on the operating company itself, and its ability to generate positive cash flow.
They generated some $5,566,241 from their operating activities so far in 2015, which has been phenomenal growth from where they sat a year ago. On the other hand their expenses have also exploded over that time, but have mainly stemmed from purchases of property and equipment from their acquisitions and reinvestment into their existing businesses. For a growing company, I like seeing this type of growth, as they set themselves up for success in the future by building their capacity. As a small company they have also been issuing debt at a relatively strong rate, around 7.5% this last quarter on convertible debentures, which for a stock with a market cap of less than $300M is fair, and has been decreasing with each further issuance.
This company relies on acquisitions for growth, which is a very challenging business model for growing the business, but when it comes down to the success of the model and execution of those acquisitions, it depends very heavily on management and their ability to execute.
ManagementTheir management team mainly consists of former staff of "Sleep Management", which was sold to PHM. It is one of their strongest growing segments among their business lines. Their CEO and President are both affiliated with that previous company, with other major staff from other acquisitions, such as their VP Operations and VP Patient Services, who were from the Resource Medical Group acquisition.
Management has grown this company very aggressively, but managed to accumulate the underlying businesses in what appear to be very reasonable multiples. Due to their size and cash position, plus taking on the previous management of their acquisitions, they have managed to keep their acquisition costs reasonable and have grown them organically and through cross-selling among their operating companies.
They have been very adept so far at finding new opportunities and for rolling them up into the parent company. Management has been issuing equity to finance this, which is a solid strategy if the add-on is at a decent price. They have also been fairly good at adding talented managers they find in the businesses they take over, ensuring a solid price, as the better the price, the more the warrants and stock options are worth to managers they take on. As they say, a business plan might look good at 11% financing, it could be a blockbuster business at 7.5%. By adding managers from amalgamated businesses Patient Home Monitoring strengthens its own internal capabilities while building on a strong platform for growth. This strategy has played out well thus far, and I expect it to continue in the future.
Recent NewsPHM share prices collapsed recently as rumors flew surrounding some transactions happening by insiders. PHM decided it had better comment on the insider moves, in a release that had several interesting tidbits, found here. Some highlights include:
Updates on acquisitions, which as mentioned earlier are sitting at about $62M of revenue potential, and they reduced the share required in a purchase transaction for Legacy Oxygen, though they reserved the right to issue more to retain management.
Share buybacks to cancel up to 14.5M of its own shares from August 7th, 2015 to August 6th, 2016.
Details of some changes requested by the BCSC and investors regarding how it discloses financial derivatives.
Comments on shareholders actions - This is what got me interesting in researching this company further.
BCSC Review - As to some confusing balance sheet questions that investors had, along with a BCSC (British Columbian Securities Commission) review, they clarified their filings and noted that to report is more accurately they increased shareholders equity by $18M and decreased conversion liability warrants by $18M (one to one) that resulted in a decrease of operating net profit after tax by $909,492 on the financial statements This was a non-cash, IFRS accounting expense that was incorrectly registered on the balance sheet, and they described it in more detail on their SEDAR filings, shown below:
As a non-cash charge, it is more comforting to note that this was the only result of the BCSC's review, as that alone is always a harrowing experience wondering if the exchange commission will find serious issues. Misreporting their net profit (loss) after tax is arguably a pretty serious charge, but the mistake was more than compensated for in the round of selling that occurred following the news spreading of insider selling that turned out to be less material than expected.
Shareholder Actions - As it turns out Michael Dalsin and Roger Greene sold shares they owned to a fund, "Healthcare Special Opportunities Fund" (TSE: MDS.UN) in part to satisfy a tax liability, and elected to retain shares in their personal names that were not eligible for transfer to the fund. They are non-executive board members and advisors to the company, which meant that investors saw two prominent shareholders dumping shares in the company (insider reported transaction of heavy selling), with no disclosure to show that they were effectively retaining ownership, but through another vehicle.
By selling these positions to the fund it can be argued that they "exited the business", but with still large internal holdings, along with personal investment and professional reputation tied to their closed ended Healthcare fund, I would argue that the case is greater that they still had solid belief in the company, but the most efficient way to rearrange their own portfolio was to initiate this arrangement. I could see them believing it was an immaterial move that would allow them to satisfy their personal tax maneuverings without market impact… Right up until everyone reacted to what appeared to be two insiders dumping the stock.
ValuationThis company is a tricky one for comparables, due to the nature of their industry (mostly small, private players) so comparables are hard to find. Instead I will compare the growth rates and gross margins of some healthcare players in Canada to attempt to find a reference point for comparison of Patient Home Monitoring. |
