buy $7.00 initiating coverage€¦ · 25.04.2018 · viemed is focused on the respiratory market...

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

[email protected]

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.

mailto:[email protected]

April 25, 2018 | Doug Cooper | 416-643-3863 | [email protected]

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




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).




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.




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.




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.




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




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:




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




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;




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).




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




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.




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.




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.




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




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




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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their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries.

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%

Tender 1 1.0% Tender Clients are advised to tender their shares to a takeover bid or similar offer

Total 97 100%

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