Description

All amounts in USD, unless otherwise stated.

Nova Leap Health (“NLH” on Canadian TSX Venture Exchange) caught our attention: trading as a “broken” roll-up but arguably without severe brokenness. Recently, sales declined (one location was closed), and EBITDA margin has trended down. The negative growth and declining margin, amid other concerns, have “broken” the stock, down -80% from its high in mid-2021.

BACKGROUND

The category of senior home care agencies seems to check the major boxes for a potential successful roll-up: a fragmented industry (with succession issues) and a “boring” industry (without high complexity).

Senior home care agencies are a growing category due to nice tailwinds: more than 10,000 adults turn 65 each day in the U.S, and seniors increasingly desire to stay in their homes for as long as practical (a trend accelerated by COVID-19) and avoid entering assisted living facilities (which come with restrictive rules and high expenses).

IMPORTANT FOCUS on DEMENTIA CARE and PRIVATE PAY

NLH’s team is led by Chris Dobbin, who has a CPA background from Grant Thornton (of course, their auditor). He seems to have the financial discipline, as well as multi-decade patience, to make acquisitions and grow the company over the long haul. The company is 7.5 years into a journey of perhaps 30 years. Importantly, insiders own 40.0% of shares and continue to accumulate shares (a rarity in public companies).

NLH’s agencies perform home care services with a focus on patients with dementia (which can be rewarded with a premium fee). Activities covered can include personal grooming (bathing, getting dressed), companionship, medication management, errands (groceries, etc.), light housekeeping, transportation, and cooking and meal preparation. Services generally do not include specialized skilled nursing (e.g. respiratory therapy) or physical therapy.

NLH is focused on private pay (again, which can be rewarded with a premium fee), though there is some long-term care insurance and VA insurance in the mix.

COMPANY TODAY

NLH has agencies in Nova Scotia and eleven states, including Texas, Oklahoma, Arkansas, Ohio, Kentucky, Massachusetts, New Hampshire, Vermont, New Hampshire, and Rhode Island. To date, NLH has completed about 20 total acquisitions, buying mature (5+ operating history) agencies for 4.5-5x EBITDA. They have only opened one location organically (in Ohio).

Overall, NLH has a steady and attractive gross margin of 36.0% in the U.S. That makes us bullish on the long-term prospects of the roll-up strategy. Revenue per hour is around $26 and cost per hour is around $17. Staff is currently around 850 and virtually all staff work remotely (no offices other than HQ).

NLH has cash of $0.9 M and unused credit facility of $1.1 M. In his June letter, CEO Dobbin’s projects bank debt to be under $0.3 M by the end of 2023. Just recently, promissory notes that were $0.9 M at the end of the first quarter were reduced by 28.7% due to a legal settlement with one of the agency’s former owners. With positive EBITDA this year, that roughly implies a net cash position by year-end.

COMPETITION and EXECUTION (YEARS 1-8)

Unlike home respiratory therapy (only a handful of players), arguably no barrier to entry exists for home care services providers. Endless listings can be found on Care.com, and an almost endless list of upstarts and startups can be found on Crunchbase.

Execution means finding a path of growing revenue and lowering costs. NLH hires regional managers who oversee agencies in several states. These managers implement price increases in each market. The managers also implement software to better optimize scheduling (e.g. reducing overtime hours). In addition to regional managers, NLH has been driving down head office/operations management and G&A as a % of sales (down from 33.9% in 2021 to 33.0% in 2022). Public company costs are mostly fixed, and the HQ team is lean (CEO, CFO, business development). Plus, each accountant can handle a region (perhaps 4-5 agencies).  

PONDERING THE COMPANY WHEN IT IS TWICE AS OLD (YEAR 15)

Over 7.5 years, NLH has cobbled together $28 M in revenue (at 36% gross margin) by using only a few million in debt (again, almost repaid) and about $4 M in equity issuance (including IPO proceeds). Acquisitions are generally less than 25% equity. Management and board pay is very reasonable, though there is some stock compensation.

As of today, NLH stock is not cheap (adjusted EBITDA is under $1 M and the FD market cap is $12 M), and the stock is uninteresting without a return to strong growth. Despite that, NLH could reenergize and restart acquiring 4-6 agencies a year with modest debt and modest creep to share count. Perhaps 7.5 years from now, NLH could triple its footprint to ~60 agencies and $90 M in sales. At $90 M sales with 36% gross margin and 25% head office/operations management and G&A (down from 33.0% in 2022 and 33.9% in 2021; with the assumption that scale efficiencies continue to reduce overhead ~100 bp a year), that implies an 11% EBITDA margin. With $90 M sales with 11% EBITDA and a 10x eventual multiple of that EBITDA, that implies a $100 M EV. With a net cash position and share count growing from 86 to 120 M (4-5 M share creep each year), that implies an $0.83 stock, up about +500% from here (a return to an all-time high).

Again, it comes down to whether management can string together many more years of solid execution, which they have arguably demonstrated over the last 7.5 years.

Catalyst

Continued insider buying (insiders own 40.0%)

Restarts 4-6 agency acquisitions per year with similar gross margin (36%)

EBITDA margin expansion