ALLIED HEALTHCARE INTL INC AHCI
May 12, 2010 - 11:10am EST by
SpocksBrainX
2010 2011
Price: 2.51 EPS $0.24 $0.00
Shares Out. (in M): 45 P/E 10.5x 0.0x
Market Cap (in M): 114 P/FCF 9.8x 0.0x
Net Debt (in M): -41 EBIT 0 0
TEV: 72 TEV/EBIT 0.0x 0.0x

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Description

 
Thesis
AHCI is an asset play and growth company rolled into one.  The asset is the strong balance sheet with 92c in cash (37% of the current cap) and high free cash flow (almost 12m on an 72m adjusted cap excluding cash).  The company's business is mostly recurring, with 3 to 5 year contracts, and the staffing side which has experienced pressure is increasingly becoming a smaller part of the business.   Insider ownership is minimal (2%) and you do have to worry about currency, acquisitions, and a general inability to monitor this business model (business is based in the UK), and management unwilling to buy its own shares despite the free cash flow yield here equalling 16%.       
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Business
Please see the 2-20-09 GOCANCUCKS97 writeup for this company (price was $1.20 then).   Very little has changed (except the valuation a lot higher) beyond continued strength in homecare with continued weakness in nursing and hospital staffing, though management remains somewhat optimistic on hospital while downright grim on nursing (7% of Q1 revenue).
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here is a list of positives and negatives
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POSITIVES
  • 41m in cash on the BS with no debt (in stering)
  • Big free cash flow yield (16% on a trailing basis)
  • Significant portion of business is recurring (3-5 year contracts, though getting granular information on this is very difficult for me at least)
  • Homecare showing good growth (30858-34162-35763-35903-35860 GBP from Q2-09 to Q2-10)
  • Acquisitions could juice growth rate (management has stated in previous calls that they expected something to happen here by 2H of 2010; if not, they will look for other methods to boost shareholder value, though there were no statements like this in the latest call) and the fact that they've talked about it for a while without pulling the trigger might be an encouraging sign that management will be price-sensitive
  • Cheap on a valuation basis
  • in theory, emphasis on homecare as opposed to hospital care could be cheaper in the long-term for those providing healthcare, so there might be a built-in incentive to beef up this business long-term for those with budgetary pressures
NEGATIVES
  • Based in UK - familiarity and exchange rate issues
  • Doesn't pay dividend or buy shares
  • Options pretty high (though cancellations have been high too) at about 3% as a percentage of the diluted share count for past 3 years
  • As currently configured, not much of an operating history (see corporate history listed below)
  • Pressure on Staffing part of business (getting smaller)
  • Fears of pricing pressures for contracts, eps as UK addresses budgetary issues
  • No Moat - see previous canucks posting for discussion of fragmentation of business
A few notes on the business and how AHCI ended up as a UK-based homecare company listed on the Nasdaq
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 Business
  • 113 branches with 90% coverage of UK
  • Customer is elderly; learning disability
  • Provides domiciliary care, which is personal or basic care
  • 3.9% market share
  • Payors include Local Govt authorities and NHS Primary Care Trust (for HC)
  • Balance of sales is staffing to nursing homes and hospitals
  • CEO is Sandy Young; CFO is Paul Weston
  • Bids are 50% based on price, 50% on quality
  • Home Care is 84%; Establishment at 9%; Hospital at 7%
  • 84% of revenue is recurring on 3 to 5 year agreements
  • Top 6 competitors have less than a 20% share
  • Over 2000 companies competing
 Corporate History
  • Originated in US - mid 90s
  • 1997 - acquired UK companies
  • 2003 - sold US division
  • 2004 - did a secondary and listed on NASDAQ
  • 2005 - established 108 branches by expansion and acquisition
  • 2007 - disposed of Allied Respiratory for 75m and paid down bank debt
  • 2008 - focus on Homecare; entering learning disability and continuing care markets
 
Sales Trends
  • Q1 to 4 for 08, 09: HC: 27-28-29-30-31-31-34-36
  • Pressure has been on Nursing homes and hospital staffing (year 21-17; 16-13)
  • Exchange rate also played havoc - 2.05 in Q1 08 and 1.64 in latest
 Sales Growth Drivers
  • Specialist services (continuing care and learning disabilities)
  • Expand branch network
  • Win contracts (consolidation of suppliers)
  • Acquisitions
  • Focus on quality - currently above market average - aim to be market leader
  • IT updates ongoing
Conclusion
I just think this is still very cheap, enough to overcome valid and important worries regarding currency, competition, the UK as an investment sector, and management's refusal to date to consider dividends or share buybacks. 
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Note:  the price has fluctuated in a wide range lately - 10c since I've been typing this, and $2.30 just a few days ago during the rout.  There is also an unusual 8-k filed lately which could be the precusor to more interest in itself being acquired, though that is pure conjecture at this point.

Catalyst

A good acquisition or dividend/buyback which puts this cash to use.
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    Description

     
    Thesis
    AHCI is an asset play and growth company rolled into one.  The asset is the strong balance sheet with 92c in cash (37% of the current cap) and high free cash flow (almost 12m on an 72m adjusted cap excluding cash).  The company's business is mostly recurring, with 3 to 5 year contracts, and the staffing side which has experienced pressure is increasingly becoming a smaller part of the business.   Insider ownership is minimal (2%) and you do have to worry about currency, acquisitions, and a general inability to monitor this business model (business is based in the UK), and management unwilling to buy its own shares despite the free cash flow yield here equalling 16%.       
    .
    Business
    Please see the 2-20-09 GOCANCUCKS97 writeup for this company (price was $1.20 then).   Very little has changed (except the valuation a lot higher) beyond continued strength in homecare with continued weakness in nursing and hospital staffing, though management remains somewhat optimistic on hospital while downright grim on nursing (7% of Q1 revenue).
    .
    here is a list of positives and negatives
    .
    POSITIVES
    NEGATIVES
    A few notes on the business and how AHCI ended up as a UK-based homecare company listed on the Nasdaq
    .
     Business
     Corporate History
     
    Sales Trends
     Sales Growth Drivers
    Conclusion
    I just think this is still very cheap, enough to overcome valid and important worries regarding currency, competition, the UK as an investment sector, and management's refusal to date to consider dividends or share buybacks. 
    .
    .
    Note:  the price has fluctuated in a wide range lately - 10c since I've been typing this, and $2.30 just a few days ago during the rout.  There is also an unusual 8-k filed lately which could be the precusor to more interest in itself being acquired, though that is pure conjecture at this point.

    Catalyst

    A good acquisition or dividend/buyback which puts this cash to use.

    Messages


    SubjectRE: comments
    Entry05/12/2010 12:11 PM
    MemberSpocksBrainX
    Thanks for the comments
     
    on UK pricing pressure, and I'm sure this may not be a good analogy, but you might hope that over time any sort of pricing pressure would have the effect of consolidating the moms and pops into the larger players ala what's happened with Lincare Holdings (LNCR) here in the US.  Course, I could be just dreaming, but at this valuation you would think they could stand some things to not go perfect for the stock to work anyway (course, as an owner I'm going to see it that way).
     
    Course, it isn't at $1.20 anymore either...

    Subjectauthor's rating
    Entry05/12/2010 01:32 PM
    MemberSpocksBrainX
    as with most of my ideas, I gave this a "6" on performance

    Subjectcash holding
    Entry05/12/2010 01:47 PM
    MemberSpocksBrainX
    my wording is misleading - on the BS, there is 41m USD or 27.6 lbs, depending on day used (appx May 5th per ahci EA release) of course

    Subjectupdate
    Entry05/17/2010 03:40 PM
    MemberSpocksBrainX
    AHCI put some of the cash to work, buying a homecare biz in Ireland (HC).  Cost 5.8m USD for a 50.1% share with put and call options on both sides for the rest (16.5m USD max subject to conditions).  HC did 13.9m in USD sales, 0.4m profit.  Ahci says it will be "earnings enhancing" and also suggested that the outsourcing trends in the acquired areas had more growth potential.  My reaction was pretty subdued - it doesn't make that much dent in the current cash (not even with the free cash flow for the past 12 months) though it leaves them on the hook for more, but you would hope this company would still consider buybacks/dividends.   I mean, they could easily authorize a $5m USD buyback with no trouble at all....

    Subjectupdate 2
    Entry05/18/2010 10:39 AM
    MemberSpocksBrainX
    company just announced an authorization for a 10m buyback

    SubjectRE: latest quarter
    Entry08/04/2010 12:33 PM
    MemberSpocksBrainX
    I don't have a whole lot to add to what you suggested - agree that wildcard is contract pricing pressure, but the valuation seems to suggest declining revenue vs. any growth.  Like you suggested, I thought the quarter was mostly ok but with some negatives.  From what I see:
    Positives
    36.9m net cash (24.5 lbs) or 82c a share
    Buyback of 1.1m shares for 2.8m
    Operating growth, sans acquisitions and fx, up double digits
    Management sounds optimistic on Ireland acquisition
    Optimistic they can expand continuing care from 1/2 of branches
    Flat Hospital revenue (seems stable now)
    Negatives
    Sees Homecare as 5 to 10% top line grower over 2-3 years at least (down from 10 to 15%)
    Suggestion of eventual pricing pressure from local government authorities (see above)
    Nursing homes not likely to see any short-term improvement (6.4% of revenue)
    Misc
    They still sound set on doing acquisitions.
    I like the pace of the buyback and take this as a really good sign that management sees the same things that I am seeing.  If they were that pessimistic on the future, I'm not sure of the logic of either buybacks or acquisitions.
    -at latest $2.36, 10.8m in free cash or a 15% yield, though there were acquisition related charges and revenue in Q3.
    I don't plan to alter my position size.  I would admit I wish I was there in the UK to better understand future bugetary conditions, and you get the feeling that it is going to take a while for this to work. 

    SubjectRE: RE: RE: RE: latest quarter
    Entry10/05/2010 11:18 AM
    MemberSpocksBrainX
    i'd be interested!  esp. any conclusions

    SubjectRE: Author Exit Recommendation
    Entry10/18/2010 03:59 PM
    MemberSpocksBrainX
    no great shakes - I still think stock is cheap (andreas did a better job here than I did) but felt increasingly like this position - business - is outside the realm of the usual things I feel comfortable with, especially since it reminded me so much of Lincare Holdings which has always been buffeted by repeated reductions in remibursement rates.  So many things here seem to me to be suggested future actions - cash flow, the consolidation of suppliers, the guess that many cuts won't reach AHCI - but the one thing that seems definite is the 25% reduction in revenue from federal sources (and I have no idea if that number is even appropriate) and that is the reason for my unease, especially compared to my dumb retailers. 
     Course, the company would still make a likely takeover target, but I'm not going to hold positions for that reason alone. 

    SubjectRE: RE: RE: Author Exit Recommendation
    Entry08/30/2011 02:17 PM
    MemberSpocksBrainX
    thanks for the kind words - even if I didn't stay in ahci myself
    if you have time, please consider looking at esl.to.  It is my largest position, and

    SubjectRE: RE: RE: RE: RE: Author Exit Recommendation
    Entry08/30/2011 04:09 PM
    Memberzzz007
    Paul...would you mind very briefly layout out how you get to your 16% FCF yield.  I assume you're backing cash/shr out of the share price...
     
    Thx,
     
    zzz
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