This healthcare company saw double-digit sales growth in its last quarter, and guidance for next quarter is very positive.
Viemed Healthcare, Inc. (VMD)
From Internet Wealth Builder
Viemed Healthcare, Inc. (VMD), through its wholly owned subsidiaries Sleep Management and Home Sleep, is a participating Medicare durable medical equipment supplier that provides post-acute respiratory care services in the United States.
In layman’s terms, the company places respiratory therapists inside the home to treat patients with very sick lungs. Many of these patients are unfortunately at the end stage of their life, at a time when they are most likely to visit the hospital. The service prevents these hospital readmissions from occurring. The primary disease treated is COPD or chronic obstructive pulmonary disease. With almost 25 million Americans reporting that they have been diagnosed with COPD, it is the country’s third largest killer behind cancer and congestive heart failure. The company provides a solution for people who suffer from this debilitating disease.
Viemed uses non-invasive ventilators (NIV) which allows caregivers to ventilate the patient with a mask versus forcing them to be in the bed intubated. The quality of life is better, and the healthcare costs decrease.
Viemed once again reported record second quarterly result and, perhaps most importantly, guided towards strong growth for the third quarter. Second quarter revenues jumped 45% to $22.5 million, which beat estimates. Gross margin expanded from 73% last year to 74.8%.
The stock appears to have sold off from record highs based on EBITDA and adjusted EBITDA compression fears. The company reported EBITDA at $4.6 million, slightly below expectations. This was due to elevated and continued investment in the business, including the Nasdaq listing costs (one-time), workforce costs, and technological investments. The adjusted EBITDA compressed from 23.7% in the first quarter to 20.5% in the second quarter. The key item from the conference call after the release was management’s confidence that adjusted EBITDA margins in the second half would be more in line with prior year margins (24-26%). That would be a significant bounce back from second quarter and even first quarter levels.
Viemed expects to generate total revenues of approximately $23.7 to $24.5 million during the third quarter. The mid-point of the revenue guidance represents a 41% increase over the quarter ended Sept. 30, 2018. Additionally, the company expects to have higher margins during the back half of the year, more in line with prior year margins.
The potential market for noninvasive ventilation (NIV) remains large and, despite its growth, Viemed is only scratching the surface. In fact, the entire NIV market penetration is less than 10% of its potential.
As physicians and care givers become aware of the clinical efficacy of the therapy, there is potential that the referrals from them could snowball. A recent clinical study undertaken by KPMG showing the positives of the company’s in-home NIV strategy has just been started to be marketed by Viemed. Dissemination of that report should dramatically accelerate awareness and recruitment of patients.
Additional products (outside of NIVs) offered by Viemed, including vests, are starting to contribute to revenue. With its infrastructure in place (respiratory therapists and registered nurses), it appears the company can provide more in-house services to the same client. The product diversification strategy could not only reduce risk but grow its brand as a one-stop service company.
Given the emerging track record of strong organic growth, from an enterprise value to adjusted EBITDA or EV/aEBITDA basis, we believe Viemed should trade in the range of 14 times 2019 adjusted EBITDA. We model for adjusted EBITDA in 2019 of approximately US$20.2 million, or C$26.61 (C$0.71 per share). We adjust this target higher given the current adjusted EBITDA margin including increased spending on infrastructure (employees, technology) as well as a one-time spend to prepare for its Nasdaq listing, and the fact that margins should move higher once again in the second half of 2019.
Given the company’s clean balance sheet and solid cash position, we maintain our fair value over the course of the next year to the range of $11.75. This fair value estimate over the next 6-12 months is based on current reimbursement rates and could fluctuate with the value of the Canadian dollar versus the U.S. dollar (a decrease is a positive adjustment; increase is a negative) and based on management continuing cost controls and executing on the company’s stated growth goals. We expect acceleration in EBITDA growth rates in 2020, which could lead to a significant increase in our fair value estimate if EBITDA margins return to higher levels over the next two quarters.
We reiterate our Speculative Buy recommendation. We continue to see long-term value in the current range with a 2-5 year holding period outlook.
Ryan Irvine in Gordon Pape’s Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, October 21, 2019