Each week at Stocks Down Under, we write one in-depth article about a particular company we like and this week it is Healthia (ASX:HLA). Healthia is one of those companies that has been sold off because of short-term issues that don’t impact the long-term demand. But when will it turn around?
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Who is Healthia?
Healthia is a roll-up company of allied healthcare practices. Its offerings include occupational therapy, exercise physiology, speech pathology clinics, optometry and audiology stores.
By being a ‘roll up’ of health practices, Healthia can create synergies and generate cost savings that otherwise wouldn’t be avaliable through scale and improved practice management.
Healthia listed in late 2018 at $1 a share and a market capitalisation of $63m, having begun 14 years earlier with just one clinic, reaching 104 by 2018 and over 300 today.
It’s got some familiar faces behind it
Healthia is chaired by Glen Richards, a name that might be familiar with some investors because he was the founding chief of vet provider Greencross that was also ASX listed before being acquired. You may also know Richards for being a judge on TV series Shark Tank. Also sitting on Healthia’s board from Greencross was the took former CFO of Greencross, Wesley Coote, who serves as Healthia’s Managing Director. Richards holds a >5% stake in the business as does Wilson Asset Management and MA Financial whixh hold over 9% each.
It has recorded growth, but the right kind of growth?
Today, Healthia’s market capitalisation is nearly 3 times higher than when it listed – at ~$187m, but the share price is just 38% higher at $1.38. It has raised significant capital since listing, including a $60m raise in September 2021 to buy 64 physiotherapy clinics from Bakck in Motion, a deal that added over $60m in revenue to the company. And in September 2022, it raised $15m to buy a total of 12 businesses.
You see, Healthia is in a number big markets that are highly fragmented with several operators and it wants to grow its market share both through M&A and organic growth in its existing assets. And while some industries are known for being M&A heavy, meaning there’s competition for acquisitions, physiotherapy is not one of them.
Healthia had a solid FY22 with $202.8m in revenue (up 44%), $24.5m in EBITDA (up 14.3%) and a $9.2m NPAT (up 3.8%). In 1HY23, it made $125m in revenue (up 34%), $18.1m in EBITDA and a $9.2m underlying NPAT (both up 42%).
For FY23, it is expecting EBITDA of over $40m, which would be at least 60% greater than FY22. Consensus estimates agree with that and further estimate $269m in revenue (up 32%) and 11c EPS (up 38%). Turning to FY24 (which begins on July 1), consensus estimates call for $304.5m in revenue (up 13%), $48.2m EBITDA (up 18%) and 14c EPS (up 27%).
You can obtain this growth in FY24 for just 7.2x EV/EBITDA, 9x P/E and 0.4x PEG!
So, why has it been sold off?
We think investors fear that consumers will cut their spending on the services Healthia provides. Unlike the services provided by other healthcare stocks (such as pathology), services like physiotherapy and speech therapy typically are not fully covered by Medicare.
As the company admitted in its prospectus, private health insurance drives industry revenue and individuals are more likely to spend money on these services when disposable levels of income are growing. In respect of physiotherapy, it also helps when there is an increase in participation of sports – both organised and casual.
Investors have also been sceptical of ‘roll up’ companies, a casual term for businesses that build themselves up through M&A. Other ASX examples include DGL Group (ASX: DGL), Corporate Travel (ASX:CTM) and WiseTech (ASX: WTC), although the latter has done extremely well over the years.
In a period of record low interest rates and high share market valuations, it is easy to take out competition like prey but not as much in a period of rising interest rates and lower share market valuations – a concept known as ‘multiple arbitrage’. Investors are becoming sceptical that companies are really growing and are only growing through capital consuming M&A deals. There are plenty of success stories globally (like JP Morgan and Berkshire Hathway), but few in Australia except iiNet.
But even with all this M&A activity, Healthia still only has <4% of the physiotherapy market, <2.5% of the podiatry market and <1.5% of the optometry industry, so we see potential for further expansion
Why we back it
We don’t think the ‘cost of living’ crisis will last forever and we think it can gain from favourable demographics. Physiotherapy and podiatry clinics tend to be utilised by older consumers with higher levels of disposable income and more likely to have private health insurance. The longer-term aging of the population and increasing health consciousness will help too. We also like the company’s Clinic Class Share model allows clinicians to have continued ownership in the clinics they continue to work in, which will help with vendor engagement post-acquisitions.
Our models (adopting consensus estimates and using an 11.37% WAAC) suggest it could be worth over $4 per share if it lives up to its potential. We even think, similar to Silk Laser Australia (ASX:SLA) which we wrote about in early March (just 6 weeks before it received a bid), it could be a takeover target.
Ultimately if the public markets won’t re-rate a good business, the private markets will. We think this saying could well ring true with Healthia. We are confident it will re-rate, one way or another.
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