Business Overview:
Allied Healthcare is a provider of domestic healthcare staffing. They get contracted to provide the staff for home visits to elderly and special needs individuals to assist them with basic living functions such as bathing and dressing through 115 branches around the UK. The company operations are mostly decentralized with branch managers tasked with meeting targets for operations. The contracts through which services are provided are negotiated on 3-5 year basis with local government social services. The government comprises 80% of the company’s revenue with private work making up the remainder. Government revenue is much more fragmented than first glance, as it is comprised of many contracts at the local level with local governments. The company derives its revenue entirely from the UK and Ireland.
Business Risk
The company derives the bulk of its revenue as a result of government spending on healthcare. Like the United States, the UK is looking to cut back healthcare spending. This is a combination of rising healthcare costs and UK government deficits. The healthcare rules, like the US, are constantly changing. The risk to Allied Healthcare is minimal. The service it provides is itself a cheap alternative to other forms of healthcare that would be picked up by the state. Their homecare services reduce the need for full time residential housing of elderly, which is more expensive. There are also the increasing trends of outsourcing the work to private firms as well as aging demographics. The most recent quarter saw pressure on earnings as a result of these changes, but the long term outlook is favorable considering the low cost option that homecare offers.
Valuation:
There are 43,923 fully diluted shares outstanding and a current market price of $2.40 per share for a market capitalization of $105m. There is net cash of $35m on the balance sheet. The enterprise value is $70m. The company has earning $8.8m in the past twelve months. The company trades at 8x earnings net of cash and 5x EV/EBITDA.
The company disposed of its last non-homecare business at the end of 2007, paying off all its debt and positioning the company on its current path. The periods of 2008, 2009, and 2010 saw earnings of $8.7m, $9.9m, and $9.8m respectively, averaging $9.5m. The numbers lie when it comes to the telling potential investors about the growing earnings of the company. The GBP:USD exchange rate fell from an annual average of 1.85 to 1.54 over this period. In GBP, revenue has been steadily growing. When translated into USD, the revenue looks very volatile, although that is the exchange rate, not the underlying business.
Acromas, a company looking to consolidate the homecare industry through its Saga subsidiary, recently acquired Nestor Healthcare Group, a competitor of Allied Healthcare, for £124m or £136m including debt. Nestor generates more than two thirds of its revenue from social care of patients in their home and about a third from primary care of patients. Three private equity groups own Acromas: CVC Capital Partners, Charterhouse and Permira. Below is a table comparing the valuation of the buyout based on annualizing the first six months of Nestor’s results in 2010. The initial offer was made in August 2010. The deal closed in January 2011 offering an optimal comparison for Allied.
Nestor Healthcare* AHCI Implied AHCI Share Price Upside
Price/Sales 0.8 0.4 $4.54 89%
EV/EBITDA 11.5 5 $4.32 80%
EBITDA 10.5 8 $3.22 34%
P/E 16 12 $3.20 33%
EV/E 18 8 $4.40 83%
Upside/Downside
The downside would be management spending the $35m cash balance on an acquisition. Done at a valuation similar to Nestor, an acquisition at 16x earnings would add $2.2m to net income. Using the current cash adjusted market multiple, the company would be worth $2.00, a downside of 16%.
A buyout scenario is addressed above, with upsides ranging from 30-90%.
Even if the company is not bought out, it trades at an absolute low valuation. The cash on hand could be put to good use in a buyback and management currently has $5m more on its current buyback. It would be nice to see management focusing on further decreasing the share count.
There would be more upside if the company listed on the UK exchange as well and moved entirely out of the US. They delisted from the AIM in London due to lack of investor interest. If you look at the conference where management has presented in the past years though, they are entirely focused on getting a US shareholder based. This is problematic though since generally speaking the US market doesn’t understand the UK healthcare system and there is currency risk.
Some things to look out for:
Board compensation has doubled since 2007 from $350,000 to $870,000. It is the equivalent of 10% of the TTM net income of the company, quite substantial. Additionally, while I do not know if they officially constitute a “poison pill,” there have been “shareholder rights” amendments to the bylaws that make it harder for the shares to be acquired. Management’s stated intent was to make sure that a buyer didn’t steal to company on the cheap. Judging from the Nestor acquisition valuation, and the deep pocketed investor behind it, there is ample interest in the sector and respectful premiums being offered. Despite this reducing the possibility of a buyout as a near term catalyst, the substantially higher valuation indicates the private market value of the firm.
Disclosure: Long AHCI
Talk to Andrew about Allied Healthcare International
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