buy $7.00 initiating coverage€¦ · 25.04.2018 · viemed is focused on the respiratory market...
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Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca
$7.00$3.26
$7.00
115%
YE: Dec 31 (US$) FY17 FY18E FY19E
Revenue ($MM) $46.9 $60.9 $76.1
EBITDA ($MM) $12.2 $16.1 $20.5
EPS $0.22 $0.24 $0.33
FY17 FY18E FY19E
EV/Sales 1.9x 1.5x 1.2x
EV/EBITDA 7.5x 5.6x 4.4x
P/E 11.6x 10.3x 7.7x
Basic 37.9
FD 37.9
Basic $124
FD $124
Net Cash $5
EV (C$) $118
$1.65 - $3.5052 Week Price Range
Estimates
Valuation
Market Cap (C$)
Stock Performance
A ll prices in US$ unless o therwise stated
Stock Data (MM)
About the Company
Viemed provides home respiratory services to patients struggling with various
respiratory diseases including COPD and various neuromuscular diseases.
With almost 25 million Americans reporting that they have been diagnosed with
COPD, the country's 3rd largest killer behind cancer and congestive heart
failure, Viemed provides a solution for people who suffer from this debilitating
disease.
Shares Outstanding
Initiating Coverage
BUY Closing Price (C$)
12-month Target Price (C$)
Potential Return
Viemed Healthcare (VMD – V)
Investors Can Breathe Easy with
Viemed
April 25, 2018
Doug Cooper, MBA
(416) 643-3863
dcooper@beaconsecurities.ca
Average healthcare spend per person increases
dramatically as one reaches 65 years old. This is
because we are more susceptible to chronic diseases
as we age.
Bearing that in mind, as the 80 million American Baby
Boomers reach retirement age, they are putting
tremendous financial strain on the healthcare system.
One way to minimize expensive hospital care is to treat
the chronic illness at home so that the condition does
not become acute.
Viemed is focused on the respiratory market in general
and the Stage 4 COPD market in particular. Its non-
invasive vent (NIV) therapy has proven efficacy and
dramatically reduces hospital re-admissions, thus
benefitting the patient and the payers. Despite this, the
installed base of NIV therapy is less than 5% of its
potential.
This conducive market condition led to a 38% y/y
increase in patients in 2017 versus 2016. We believe
such growth is sustainable. We are modeling FY18
revenue/EBITDA of $60.9m/$16.1 million with a FY18 exit
rate of $67.7m/$18.3 million. Such forecasts put its
valuation at 5.6x EV/EBITDA and 4.9x its FY18 exit rate.
Despite a growing patient base translating to growing
revenue and EBITDA, shares of Viemed trade well
below the peer group average.
An industry average multiple of 12x (if not higher), in
our view, is warranted not only because of its better
margin profile and RoE than its peer group but also its
much better organic growth rate than the group.
From both a peer group comparable analysis as well
as a DCF analysis, we believe the shares are
significantly undervalued.
We therefore initiate coverage of Viemed with a Buy
recommendation and target price of C$7.00.
April 25, 2018 | Page 2 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Table of Contents
Table of Contents ............................................................................................................................................................ 2
Investment Thesis ........................................................................................................................................................... 3
Home Sweet Home – Demographics Driving Global Growth in Home Care ........................................... 5
Respiratory Illness and COPD ..................................................................................................................................... 7
Viemed – From Acquisition to Spin Out to Renewal of Growth Trajectory .............................................. 9
Financial Forecast .......................................................................................................................................................... 12
Valuation - What’s It Worth? .................................................................................................................................... 13
Key Risks ........................................................................................................................................................................... 14
Initiating Coverage with Buy Rating and C$7.00 Target Price ..................................................................... 14
Appendix A: Financial Statements .......................................................................................................................... 16
Income Statement......................................................................................................................................................... 16
Balance Sheet ................................................................................................................................................................. 17
Statement of Cash Flows ............................................................................................................................................ 18
April 25, 2018 | Page 3 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Investment Thesis
If there is one inevitability in life, it is that we get older every day. With
advancing age comes the breakdown of our bodies. The simple fact is
that a 60-year old is more susceptible to suffer from diseases than a 20-
year old. With increased age comes increased health expenditure. On
average, the 60-year-old and above group spends 200%+ more than the
30-year old category. As the first of the 80 million Baby Boomers began to
turn 65 in 2011, that population hoard which has set trends its entire life, is
starting to have a significantly negative impact on the health care
budgets of the industrialized world. Simple math clearly demonstrates that
as the median age of all industrialized countries increases (up 4-10 years in
just the last 10 years) and health care costs increase substantially on a per
person basis as one ages, governments need to do something to bring
those costs down. One of the ways to do this is to minimize expensive
hospital care by managing patients’ chronic conditions at their home
such that the condition does not become acute (and needs hospital
care). Maybe governments are taking heed of the old proverb, “An
ounce of prevention is worth a pound of cure.” To enable a viable and
dynamic chronic home care management industry, three things are
necessary:
a) A growing demographic profile that is susceptible to chronic diseases:
We have already cited an aging population in the US. According to
the Center for Disease Control (CDC), about half of all American
adults (117 million people) had one or more chronic health conditions.
b) Technology to enable effective home management: FDA-approved
capabilities from device manufacturers have made patient self-
management at home easy and effective.
c) Re-imbursement: Either by Medicare, Medicaid or private pay,
established re-imbursement codes are a critical step to making home
management a viable industry.
According to the World Health Organization (WHO), chronic disease can
be generally grouped into 4 primary categories: cancers, cardiovascular
disease, diabetes and respiratory illnesses. Viemed Healthcare Inc (VMD –
V) is a provider of equipment and associated services to treat chronic
conditions for the latter condition, primarily Chronic Obstructive
Pulmonary Disease (COPD).
April 25, 2018 | Page 4 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Taking into consideration the above 3 data points as pertains to Viemed
and COPD, we believe the shares of VMD represent a compelling growth
story. In particular:
a) Demographics: There are ~25 million COPD patients in the United States
with ~5% of them at Stage 4 and within VMD’s specific target market. This
is expected to increase with the aging Baby Boomer cohort.
b) Technology: Up until a few years ago, there was no alternative to suffering
Stage 4 patients besides an invasive tracheotomy. Consequently, the
condition often became acute requiring expensive hospital care. Philips
launched its Trilogy non-invasive ventilator (NIV) in 2012, which for the first
time better managed the chronic condition. With the better outcomes
provided by NIVs, we believe doctors will be more likely to prescribe the
equipment. As indicated above, the potential market is ~1 million patients
but only boasts an installed base of ~50,000 implying significant room for
increased market penetration. Viemed is a value-add distributor of such
non-invasive vents with an installed base of approximately 4,500 patients
and an expected growth rate of 25%-30%.
c) Re-imbursement: There is a Medicare billing code that sets pricing at
~$950/month. Based on that, and coupled with its installed base and
growth rate, we believe Viemed can exit FY18 at a revenue run rate of
$68 million.
Given these industry attributes, we believe Viemed will have the “wind at
its back” for the foreseeable future. Assuming the company maintains its
current EBITDA margin profile, it could generate a FY18 exit rate EBITDA
run-rate of $18 million. Based on a current Enterprise Value of C$120
million, the stock trades at under 5x EV/EBITDA – a material discount even
to the low-end of its peer group. We initiate coverage of Viemed
Healthcare with a Buy recommendation and a C$7.00 target price.
April 25, 2018 | Page 5 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Home Sweet Home – Demographics
Driving Global Growth in Home Care
The industrialized world is aging rapidly. It is common knowledge that as
we age, we are more susceptible to disease as our bodies break down.
To understand the Viemed opportunity, one needs to understand the
demographic picture. From the chart below, one can see that as people
age, the average health care spend per person increases
Average Annual Health Care Expenditures by Age
Source: Urban Institute calculations from the US Department of Health and Human Services, Medical Expenditures
Panel Survey (2008)
Intuitively, we know this but the above statistics from the US Department of
Health show that in 2008, expenditures for 60+ years was $6.600+ per
persons versus $3,400 per person for the age category 45-49 (let alone
$1,959 for 25-29). Just the dollar difference between 45-50 group to 60+ is
+93%.
From the data, it is clear that age 40 is the demarcation line at which
health care costs start noticeably appreciating. Note that from ages 25-29
to 30-34 and then to 35-39, costs accelerated by 14% and 12%
respectively. However, starting at ages 40-44, costs grew by 29%,
eventually further doubling between 40-44 and the 60-64 age group.
Coincidently, the median age of most of the industrialized countries is now
over 40 and in a lot of cases, materially so. Logically, therefore, healthcare
costs are about to skyrocket in industrialized nations.
April 25, 2018 | Page 6 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Median Ages of Selected Countries
Country Median Age 10-years Ago
Japan 47.3 37.0
Germany 47.1 38.0
Italy 45.5 37.0
Austria 44.0 36.0
Canada 42.2 33.0
France 41.4 35.0
UK 40.5 36.0
USA 38.1 33.0 Source: CIA, The World Fact Book
The table above shows the median age in all industrialized countries is
moving higher.
Led by Japan at 47 years old, the US is younger at 38 years but this
average is up 5 years in just the last 10 years. It is set to go higher still as
the Baby Boomer cohort reaches retirement age. As they have their entire
lives, these 80 million Americans are now set to make a significant impact
on the health care system as ~10,000 of them turn 65 every day.
Three conclusions we reach from this demographic review:
a) As we age, we are more likely to need care as our bodies are
more susceptible to illness. That results in increased care dollars as
we age.
b) As the Baby Boomers, who have set trends since the 1950s, hits
this “Age of Illness”, it will put tremendous pressure on health care
systems.
c) Governments must look for ways to reduce health care costs.
This opportunity has spawned a new industry in the United States; one that
caters to the home needs of patients with chronic illnesses. Viemed
participates in this trend and has established itself in a specific niche (NIV
for respiratory), which has relatively few participants yet very strong
growth prospects.
April 25, 2018 | Page 7 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Respiratory Illness and COPD
According to the U.S. National Center for Health Statistics, a chronic
disease is one lasting 3 months or more and one that cannot be
prevented by vaccines or cured by medication. The leading chronic
diseases in developed countries include cancer, cardiovascular (ie. heart
attack, stroke), diabetes (caused by issues such as obesity) and
respiratory illnesses. As we noted earlier, chronic diseases tend to become
more common with age and while 88% of Americans over 65 years of age
have at least one chronic health condition, almost 50% have multiple
conditions.
Prevalence of Patients Having Multiple Chronic Conditions
Viemed was founded in 2006 to focus on one particular vertical of chronic
disease, that being respiratory conditions. In particular, the company
started selling Durable Medical Equipment (DME) products, including
Continuous Positive Airway Pressure (CPAP) masks, used primarily for sleep
apnea as well as oxygen and cannulas. However, coinciding with Philip’s
launch of its Trilogy non-invasive ventilator, Viemed expanded into the
COPD market.
COPD Primer
Chronic Obstructive Pulmonary Disease is an umbrella term used to
describe progressive lung diseases including emphysema, chronic
bronchitis and refractory asthma. As we indicated earlier, the term
chronic means that the damage to the lungs is permanent. COPD has 4
stages that range from mild to very severe:
a) Stage 1 – mild with an Forced Expiratory Volume (FEV1) about 80% of
normal
b) Stage 2 – FEV1 between 50-80% of normal
c) Stage 3 – FEV1 between 30-50% of normal
d) Stage 4 – end stage with FEV1 lower than Stage 3
April 25, 2018 | Page 8 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
The traditional method to treat early earlier stage COPD is through
improved life style choices (exercise, better nutrition) and if the situation
becomes exacerbated, through inhalers which can reduce airway
inflammation. As the disease progresses, the patient doesn’t get enough
oxygen in the blood and may need supplemental oxygen. Oxygen
therapy is the only COPD therapy proven to extend life. However, prior to
Philip’s launch of the Trilogy, such treatments could only be done at a
hospital.
Launch of NIVs – The Game Changer
In an ideal world, patients with chronic conditions should be treated at
home to ensure that the situation does not become acute and require
expensive hospital care. Until recently, Stage 4 COPD patients did not
have access to such home therapies, which resulted in numerous annual
hospital visits. However, this situation changed when Philips launched its
Trilogy unit in 2009.
Trilogy 200 Portable Unit
Source: Philips Respironics
As indicated, Philip’s revolutionary design is in its simplicity (large easy to
read digital display screen), data storage, battery power (3-4 hours of
operation in addition to normal wall plug) and, perhaps most importantly,
its light weight (11lbs) allows patients the freedom to move in the home
and out. Trilogy is approved by Medicare, Medicaid and many private
insurance plans.
In terms of efficacy, a July 2015 study was published in the Journal of
Clinical Sleep Medicine that evaluated COPD patients who had been
hospitalized 2 or more times within a single year with an acute COPD
exacerbation and who had been subsequently transitioned to a patient
management program where they were treated using NIV. Results of the
study found a 97% reduction in the re-admission rates in these patients
during the subsequent 12 months.
Hand-in-hand with positive efficacy for the patient comes cost savings for
all stakeholders. Philips commissioned studies, most recently in April 2017
entitled “Cost Savings from Reduced Hospitalization with Use of Home
Non-Invasive Ventilation for COPD”. The main findings of the study were:
April 25, 2018 | Page 9 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
a) Hospital and Payer Savings: Over 1 million COPD patients were
admitted to US hospitals for acute exacerbation in 2012. Of those, 23%
of cases were re-admitted to a hospital within 30 days and 49% within
60 days. The cost of COPD re-admissions is $3.2 billion per year with a
hospital cost per stay 50% higher for re-admission than for initial visit. As
per CMS (Medicare), the average cost of a hospital re-admit is
$13,671 with 25% of re-admits requiring an overnight stay. Through the
use of a NIV, which dramatically reduces the rate of re-admits, the
savings to hospitals and payers is dramatic.
In conclusion, NIV products have been launched (including other
manufacturers such ResMed and Medtronic in addition to Philips) and the
studies have been performed that show both their efficacy and their
dramatic cost savings to the stakeholders. Nevertheless, it still takes time
until such information reaches the practitioners and they feel comfortable
prescribing the technology. Consequently, of the 1.25 million people in
the US that have Stage 4 COPD and are candidates for NIV therapy, the
current installed base is only ~50,000 units or less than a 5% market
penetration. Given the advantages to all stakeholders noted above, we
believe the NIV market will remain a growth market for years to come. This
is backed by Marketresearchfuture, who forecasts that the global market
for ventilation devices is expected to reach $6.1 billion in 2027 - a CAGR
of 12.5%.
Viemed – From Acquisition to Spin Out to
Renewal of Growth Trajectory
As we indicated earlier, Viemed made a strategic decision in 2012 to
focus on the NIV market. It was clear that this was the right decision as the
company’s revenue grew from $4.6 million in 2012 to $37.6 million in 2015.
With such tremendous growth, Viemed attracted attention of other
companies and was sold to Patient Home Monitoring (PHM – V, Buy
C$0.35 target price) in June 2015 for total consideration of ~C$100 million
(C$36 million in cash + 42.75 million shares of PHM). Unfortunately for PHM
shareholders (of which Casey Hoyt and Michael Moore of Viemed are
10% holders), this essentially marked the high water mark for the PHM
shares for a few reasons:
a) Effective January 1, 2016, CMS cut re-imbursement for NIV by 30%;
b) There were significant operational issues at the other PHM acquisitions
that resulted in huge spikes in bad debt expenses.
The combination of reduced revenue and higher expenses caused PHM’s
EBITDA to turn negative in Q2/FY16 and necessitated management to
undertake a turnaround. Coupled with PHM’s 2016 fiscal year-end, the
Board of Directors recognized that Viemed would create more
shareholder value as a stand-alone entity. On September 20, 2016, it
announced the decision to split PHM into 2 companies, effectively
spinning out Viemed to PHM’s existing shareholders whereby each PHM
shareholder would receive 1 share of Viemed for every 1 share of PHM
April 25, 2018 | Page 10 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
owned, which would then convert to 0.1 share of Viemed as it effected a
10:1 share consolidation at the same time as the spin-out. While the spin-
out took longer than expected (primarily due to questions from the
Canada Revenue Agency), it was announced on December 20, 2017
that the plan of arrangement had been approved and that Viemed
would begin trading under the symbol VMD-V on December 22, 2017.
Pertinent Deals of the Spin-Out
a) Viemed will operate its “new” business as it did the old one prior to its
acquisition by PHM, ie. focusing on NIV therapies for COPD;
b) As VMD had been operating as a stand-alone business within PHM for
the past year prior to its spin-out, it had its own balance sheet that
could be easily segmented from PHM’s. Most notably, the C$8.6 million
debenture that PHM carried stayed with PHM. Viemed recently
released its Q4/FY17 results (note it changed its YE to December from
PHM’s YE of September), which showed $5.1 million in cash, $4 million
of working capital and no debt beyond capital leases;
c) Viemed changed its reporting currency to US$ from the C$ as
reported by PHM.
Revenue Model and Growth Opportunities
We have highlighted above how Viemed is predominantly focusing on
the COPD market in general and NIV’s in particular. The business/revenue
model is as follows:
VMD has relationships with hospitals and pulmonologists in 25
states. When a patient is admitted, the doctor may prescribe the
NIV therapy;
When VMD secures the patient, a Registered Respiratory Therapist
(RT) is assigned to each patient and is on call 24x7;
The RT will give the patient a customized in-home care plan
including the use of a non-invasive ventilator, which as noted
above is covered by Medicare and private insurance;
VMD purchases the NIV hardware from a variety of manufacturers
(to hold as capital assets) and leases it to the patient and bills
$950/month to Medicare or other payers on behalf of the patient.
Average duration that a patient is on the therapy is 17 months (ie.
before patient dies). The equipment can then be re-used for new
patients. The all-in (including cost of hardware and associated
overhead such as RT visits) payback on the equipment is
approximately 14-17 months versus a 10-year life for the
equipment.
From a growth opportunity perspective, we highlighted above that of the
25 million COPD patients in the United States, the company believes that
~5%, or 1.25 million, would be eligible for its therapy. With a total industry
installed base of only 50,000, the penetration of the proven NIV therapy is
only 4%. We believe this installed base can grow substantially given:
a) Proven efficacy of the NIV therapy as noted above:
b) Proven ability to dramatically reduce hospital re-admissions and thus
save money;
April 25, 2018 | Page 11 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
c) Studies by Philips and others should increase awareness on the part of
prescribing physicians;
This has created a very conducive environment in which to grow and
Viemed is building its sales team to extend its reach both in the regions in
which it already has operations but also to expand into new states. In
fact, over the past 4 years, Viemed has grown its revenue by a CAGR of
26% - and this includes the 30% re-imbursement cut that was instituted in
2016. From a patient perspective, Viemed exited FY17 with 4,400 vent
patients under management versus 3,200 the year prior (+38%). We
believe such growth is achievable over our projection period and
beyond.
While there is certainly an abundant market opportunity for all
participants given the gap between the current installed base and those
patients who would benefit, we believe that Viemed will also continue to
gain market share. Currently, 3 companies, including Viemed control
~50% of the market (with Lincare and Apria Healthcare being the other
two). The other 50% of the market is comprised of numerous small regional
players who likely will not be able to compete as the industry becomes
more mature and sophisticated.
While we do not believe it to be core to Viemed’s growth story, we do
believe that there is the potential for acquisitions. Such a strategy would
not be driven by geographical expansion for its core business, which as
we indicated it can do organically, but rather potentially moving into
other segments of the NIV market, including pediatric respiratory disorders
(for such indications as cystic fibrosis, muscular dystrophy) versus primarily
seniors in its current book of business. Such a strategy would extend its
respiratory expertise and diversify its customer base and hence its payer
base as pediatrics would be commercial payers (ie. insurance) as
opposed to government (ie. Medicare).
April 25, 2018 | Page 12 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Financial Forecast
Viemed’s revenue is based on re-imbursement per patient. As indicated
earlier, monthly re-imbursement for NIV therapy is $950 on an uncapped
basis (ie. no limit to monthly duration). In addition to NIV therapy, Viemed
has a smaller focus on in-home sleep testing and sleep apnea treatment
as well as oxygen therapy. Therefore, on a blended basis incorporating all
of its revenue streams, we have modelled monthly rental of $1,025
($12,300/year) based on its NIV patients.
NIV Patients and Revenue (FY16-FY19e)
2016 2017 2018e 2019e
Patients, end period 3,200 4,400 5,500 6,875
Average 2,550 3,800 4,950 6,188
Rev/Patient ($000's) $12,300 $12,300 $12,300 $12,300
Revenue $31,365 $46,740 $60,885 $76,106 Source: Company Reports and Beacon Securities Ltd
From a margin perspective, Viemed generated 26% EBITDA margin in
FY17. We have modeled slightly higher margins (50 basis points) in each
subsequent year given operating leverage.
Revenue, EBITDA and EPS Forecast (FY17-FY19e)
($000's) FY17 FY18e FY19e
Revenue 46,928 60,885 76,106
EBITDA 12,195 16,135 20,549
EPS* 0.22 0.24 0.33 Source: Company Reports and Beacon Securities Ltd
*Company did not pay taxes in FY17 while we have modeled 25% in FY18 and FY19
For all growth companies, we believe it is important for investors to
understand the exit revenue/EBITDA run-rate and focus on that valuation.
For instance, based on the table above, we anticipate a FY18 and FY19
exit rates of 5,500 and 6,875 patients respectively. At $12,300 annual
rev/patient, that would imply an exit run-rate of $67.7 million in December
2018 and $84.6 million in December 2019. A 27% margin assumption would
yield EBITDA of $18.3 million and $22.8 million for FY18 and FY19
respectively.
Debt Free Balance Sheet and Free Cash Flow Funds Growth
As mentioned earlier, when Viemed was spun-out of PHM, the C$8.6
million debenture of the pre-split company stayed with PHM. As such,
Viemed started its life as a stand-alone public company with no debt,
aside from capital leases, which were used to fund purchases of NIV
equipment.
Given its strong EBITDA margin profile, de minimis interest expense on the
aforementioned capital leases and benefiting from some tax losses as well
as President’s Trump lower tax plan, we expect the company’s free cash
April 25, 2018 | Page 13 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
flow to approximate EBITDA (excluding changes in working capital). From
there, it should be able to fund its own growth through cash flow. To
facilitate faster growth, the company announced a $5 million commercial
loan agreement with WHITNEY BANK, a Mississippi state chartered bank; a
facility that will carry an interest rate that is based on 1-month LIBOR + 3%.
As of today, that facility remains undrawn.
Valuation - What’s It Worth?
From a valuation perspective, we believe the shares of Viemed are
incredibly undervalued and the current price neither reflects the positive
macro dynamics of the industry nor the company’s historical or future
prospects.
We can envision several scenarios under which investors could
experience a significant increase in the share price of VMD.
a) EBITDA Growth and Multiple Expansion: We have outlined above how we
believe Viemed will experience significant EBITDA growth over our
projection period. A Canadian-listed peer group of healthcare service
companies trades at an average EV/EBITDA multiple of 12x with a spread
of 4x for Patient Home Monitoring (PHM, Buy C$0.35 target price) and a
high of 16x for Savaria Corp (SIS – T, Not Rated). Interestingly, money has
been flowing into the demographically driven healthcare service
companies as Savaria recently raised C$50 million at a 16x EV/EBITDA
valuation while Park Lawn Corp (PLC – T, Not Rated) raised C$165 million
at an approximate 12x valuation.
In the United States, Lincare and Apria Healthcare, the two largest players
competing in the home health respiratory market, are both multibillion
companies that are private – Lincare was bought by German-based
Linde Group in 2012 for $4.6 billion (~10x EBITDA) and Apria Healthcare is
owned by the Blackstone Group who bought it in 2008 for $1.7 billion.
Looking at the valuation of some of the equipment manufacturers,
Resmed (RMD – N, Not Rated) trades at 21x EV/EBITDA. Shares of Resmed
recently traded at an all-time high, are up 100% over the past 2-years and
up 10-fold over the past decade.
Viemed’s current price of C$3.26 reflects a valuation of 5.6x our FY18
EBITDA forecast and 4.4x for FY19. An average peer group multiple of 12x
on our FY18 forecast would yield a stock price of C$6.50 (assuming FX rate
of $1.30) for Viemed while 12x its FY18 exit-rate EBITDA of $18 million would
yield a target of C$7.25.
b) DCF Valuation at C$7.23: From an intrinsic value perspective, our
discounted cash flow valuation yields a target price of ~C$7.25 based on
a discount rate of 12%. The delta of a 100 basis point change in the
discount rate equates to ~C$0.85.
April 25, 2018 | Page 14 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Key Risks
Medicare Re-imbursement: Viemed’s revenue is based on re-imbursement
rates set by Medicare. If those rates are reduced, this would negatively
impact revenue and margins. We note that re-imbursement for NIV was
cut 30% effective January 1, 2016. This cut was more severe than
envisioned (and was the primary cause for the drop in the share price of
PHM at the time). As such, we do not believe that this segment is due for
another cut over our projection period, especially given the benefits that
NIV provides to all stakeholders as noted earlier in the report.
Competition: As noted earlier in the report, Viemed competes against
Lincare and Apria – two companies that are much larger than Viemed.
However, as we also noted, the market is large enough for all of these
companies and NIV represents a small percentage of Lincare and Apria’s
business.
Foreign Exchange: Viemed’s business is entirely based in the United States
but its shares are quoted in Canadian dollars. If the C$ appreciates versus
the US$, the shares would be negatively impacted based on the
translation of the currency.
Initiating Coverage with Buy Rating and
C$7.00 Target Price
We are initiating coverage of Viemed Healthcare with a Buy rating and a
target price of C$7.00. In summary, our recommendation is based on the
following:
a) Average healthcare spend per person increases dramatically as one
reaches 65 years old. This is because we are more susceptible to
chronic diseases as we age;
b) Bearing that in mind, as the 80 million American Baby Boomers reach
retirement age (oldest baby boomers are now 72, youngest are 54),
they are putting tremendous financial strain on the healthcare system;
c) One way to minimize expensive hospital care is to treat the chronic
illness at home so that the condition does not become acute;
d) Viemed is focused on the respiratory market in general and the Stage
4 COPD market in particular. Its non-invasive vent therapy has proven
efficacy and dramatically reduces hospital re-admissions, thus
benefitting the patient and the payers. Despite this, the installed base
of NIV therapy is less than 5% of its potential;
e) This conducive market condition led to 38% y/y increase in patients in
2017 versus 2016. We believe such growth is sustainable;
f) Despite a growing patient base translating to growing revenue and
EBITDA, shares of Viemed trade well below the peer group average.
April 25, 2018 | Page 15 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
We suspect this will change once the company issues its Q1/FY18
results, which will be the 2nd published report post its spin-out from
PHM. The results should be released after the market close on May 7,
2018.
g) An industry average multiple (if not higher), in our view, is warranted
not only because of its better margin profile than its peer group but
also its much better organic growth rate than the group.
From both a peer group comparable analysis as well as a DCF analysis,
we believe the shares are significantly undervalued and represent an
excellent risk-return proposition. We therefore initiate coverage of Viemed
Healthcare with a Buy recommendation and a target price of C$7.00.
April 25, 2018 | Page 16 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Appendix A: Financial Statements
Income Statement
Year End: December 31 FY14 FY15 FY16 FY17 FY18e FY19e
(US$000s)
Total Revenue 23,289 37,569 31,356 46,928 60,885 76,106
Cost of Goods Sold 3,856 7,454 11,405 10,172 16,743 20,929
Gross Profit 19,433 30,115 19,951 36,756 44,142 55,177
Operating Expenses:
Administration and marketing expenses 9,561 18,179 18,144 24,561 28,007 34,628
Other 0 0 0 0 0 0
Total operating expenses 9,561 18,179 18,144 24,561 28,007 34,628
EBITDA 9,872 11,936 1,807 12,195 16,135 20,549
Amortization 385 1,037 1,424 2,543 3,532 3,647
EBIT 9,487 10,899 383 9,652 12,603 16,902
Total net interest expense 48 87 323 272 274 379
EBT & other expenses 9,439 10,812 60 9,380 12,328 16,523
Other expenses (FX, Charges) -14 0 -49 1,189 0 0
EBT 9,453 10,812 109 8,191 12,328 16,523
Tax Expense 0 1,119 -1,119 15 3,082 4,131
Net income 9,453 9,693 1,228 8,176 9,246 12,392
Shares Outstanding n/a n/a 37,910 37,910 37,910 37,910
EPS (basic) n/a n/a 0.032 0.22 0.24 0.33
Shares Outstanding (FD) n/a n/a 37,910 37,972 37,910 37,910
EPS (FD) n/a n/a 0.03 0.22 0.24 0.33
Source: Company Reports and Beacon Securities Ltd
April 25, 2018 | Page 17 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Balance Sheet
Year End: December 31 FY14 FY15 FY16 FY17 FY18e FY19e
(US$000s)
ASSETS
Cash $1,637 $3,148 $4,339 $5,098 $7,296 $20,094
Accounts receivable 4,751 8,046 4,793 9,781 12,511 15,638
Inventories 785 1,527 1,638 1,633 2,752 3,440
Prepaid expenses 160 430 426 489 489 489
Other 125 0 0 0 0 0
Total Current Assets 7,458 13,151 11,196 17,001 23,048 39,661
Capital assets 2,691 9,262 13,483 20,690 22,233 23,762
Deposits 0 0 0 0 0 0
Goodwill and Intangibles 0 0 0 0 0 0
Total Assets 10,149 22,413 24,679 37,691 45,281 63,423
Liabilities and Shareholders' Equity
Bank debt 0 0 0 0 0 0
Trade and other payables 756 2,912 4,346 3,386 4,587 5,734
Accrued liability 248 612 963 5,082 1,606 2,007
Financial lease payable 688 2,280 3,401 4,381 798 4,000
Current portion of long-term payment 25 1,437 458 0 0 0
Other 0 1,119 0 300 300 300
Total Current Liabilities 1,717 8,360 9,168 13,149 7,291 12,041
Long term debt 0 462 0 0 0 0
Long-term finance lease 0 1,939 2,631 798 5,000 6,000
Derivative financial liability 0 0 0 0 0 0
Other 0 0 0 0 0 0
Total Liabilities 1,717 10,761 11,799 13,947 12,291 18,041
Share capital 67 67 67 2,755 2,755 2,755
Retained earnings 8,365 11,585 12,813 20,989 30,235 42,627
Other 0 0 0 0 0 0
Total Shareholders' Equity 8,432 11,652 12,880 23,744 32,990 45,382
Total Liabilities and S.E. 10,149 22,413 24,679 37,691 45,281 63,423 Source: Company Reports and Beacon Securities Ltd
April 25, 2018 | Page 18 Doug Cooper | 416-643-3863 | dcooper@beaconsecurities.ca
Viemed Healthcare Inc.
Statement of Cash Flows
(US$000's) FY14 FY15 FY16 FY17 FY18e FY19e
Net Income 9,453 9,693 1,228 8,176 9,246 12,392
Depreciation 385 1,038 1,424 2,543 3,532 3,647
Other 268 1,244 4,326 6,173 0 0
Cash Flow Operations 10,106 11,975 6,978 16,892 12,778 16,039
Changes in non-cash WC (2,515) (1,789) (564) (4,868) (6,124) (2,268)
CFO (inc. changes in WC) 7,591 10,186 6,414 12,024 6,654 13,771
Capital expenditures (849) (144) (1,674) (4,003) (5,075) (5,175)
Acquisitions 0 0 0 0 0 0
Other (Net) 0 0 738 430 0 0
Cash Flow Investing (849) (144) (936) (3,573) (5,075) (5,175)
Principal Repayments (1,351) (2,058) (4,287) (7,692) (4,381) (798)
New Equity 0 0 0 0 0 0
New Debt 0 0 0 0 5,000 5,000
Other (Net) (3,754) (6,473) 0 0 0 0
Cash Flow Financing (5,105) (8,531) (4,287) (7,692) 619 4,202
Other (Net) 0 0 0 0 0 0
Cash Flow 1,637 1,511 1,191 759 2,198 12,798
Cash, begin period 0 1,637 3,148 4,339 5,098 7,296
Cash, end period 1,637 3,148 4,339 5,098 7,296 20,094 Source: Company Reports and Beacon Securities Ltd
Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca
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As at March 31, 2018 #Stocks Distribution
BUY 67 69.1% Buy Total 12-month return expected to be > 15%
Speculative Buy 11 11.3% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss
Hold 11 11.3% Hold Total 12-month return is expected to be between 0% and 15%
Sell 0 0.0% Sell Total 12-month return is expected to be negative
Under Review 7 7.2%
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Total 97 100%
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