A potential opportunity to participate in a telehealth roll-up which is tapping into the ageing demographics of the US (65+ age) to grow its topline and generate recuring revenues – which may be possible with effective execution and strong management of cash flows and net debt
Recommendation
Strong recommendation to buy this company and hold over the next five years for a valuation range of between $10.7 – $16. Recommended price to build up position is from between $4 – $4.40 as of today.
Investment Thesis and Conclusion
The US population which enters the 65+ age range has been growing at an annualized rate of close to 3.5%. Assuming similar growth continues, it may be estimated that by the year 2027, the US will at the minimum have 64 million people above the age of 65.
Quipt Home Medical Corp (QIPT US ; QIPT CN) is a telehealth company which has been growing at a clip in a highly fragmented industry. It has also increased its market share by close to 30% annualized and it is highly likely that by 2027 the company will serve close to 550,000 patients (assuming a 80bps market share of 65 million people). Furthermore, given current revenue per patient the company is likely to achieve a topline of $670mm and a normalized EBITDA of $135mm. Without any multiples expansion, and assuming EV/EBITDA of 3.5x that would lead to an approximate valuation of $10.7 equity value per share. Additionally, estimating a normalized free cash flow growth by the company ~ 10% annualized, the company could trade at a valuation of between $8 – $16 on a per share basis (using current yield of 14% and using the index average of 7% – where the spread of QUIPT
may tighten as the company grows more – with a concurrency of increased growth of free cash flow by investors leading to tightened spreads).
Given that the company has a non-cyclical sticky business, is led by a strong management team, and is operating in an industry where the FTC has come down heavily on monopolization – this bodes well for the future. Recent take-outs of OSH US and SYMH US as well as the fact that the telehealth industry is seeing an increased interest further consolidates the attractiveness of the company.
Potential Takeout
There has been talk of a potential takeout for the company. Whilst it would be difficult to ascribe a take-out or a merger possibility for the stock, using comps from OSH US (Oak Street Health Inc.) leads to the following valuation:
A note from Atrium Research (click Link) also mentions QIPT US (as well as RET/A CN – another undervalued business) as a potential take-out candidate. Whilst some of the names on the list are dodgy and do not make immediate sense, owing to quant factors / scoring as well as the fact that the family or management are not incentivized to sell a business in the near term, the note does add another layer of potential intrigue or analysis on the company.
Conclusion
Given all the above factors and the simple thesis, and given that ageing is unlikely to be “cured”
in the very near future, this company is a unique investment opportunity. At best over the next five years it is
highly likely that a CAGR of 26% will be realized with a downside CAGR of ~10%. However, keep in mind the risks of leverage if cash flows are not managed well.
(Kindly do your own due diligence and this article is not investment advice)