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Check out our Investor Webinar from 23 November 2022: Healthcare, Technology and Automotive

December 9, 2022

Cirrus Networks, CNW, Healthia, HLA, IFM, Infomedia

Investor Webinar 23 November 2022

Check out our webinar from a few weeks ago where we talked about companies in the Healthcare, Technology and Automotive sectors: Healthia (ASX:HLA), Infomedia (ASX:IFM) and Cirrus Networks (ASX:CNW).

See full transcription below.


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Check out our Investor Webinar from 23 November 2022: Healthcare, Technology and Automotive 1





Marc: Hello, and welcome to “Stocks Down Under’s” weekly investor webinar on the 23rd of November. Hey, Stu.

Stuart: Good afternoon.

Marc: A lot to talk about today. Let’s kick it off with Infomedia. And, in fact, we wanted to talk about this one last week, but then on the day that we wanted to talk about it, there was some news coming out of the company. So, what’s happening at Infomedia, Stu?

Stuart: I’m a big fan of Infomedia. This company is a truly great Australian-grown success story in the automotive sector when it relates to data coming out of automotive. And we’ll come to the issue that caused us not to talk about this a week ago in a moment. Let me explain what Infomedia actually does. So, it’s SaaS-based solutions to the parts and services sector of the automotive industry. The beginnings of this company was Microcat. The founder of Infomedia was wondering, was it possible to have a standardized format that was easy to search, that would allow people in the automotive trade to identify original equipment manufacturers to obtain the relevant parts? And with the Electronic Parts Catalogue, he created a goldmine because everyone in the world started using this as the standardized format to be able to go and get parts. Eventually, made it to CD-ROM, and then online. And these days, it’s used all around the world.

Infomedia has successfully tacked on to that business a number of other successful products and services. Superservice, which is the software that people involved in car repair and service can use to keep track of their customers in their own business. Infodrive, which is data as a service for players in the automotive industry. And then SimplePart, which is the e-commerce platform for automotive parts. All three of these businesses have either been started up or acquired by Infomedia, and they’ve enjoyed some growth.

What attracted me to this story was seeing that there were three non-binding offers from U.S. private equity firms that showed up in the middle of the year. They valued the company at least $1.70 a share. A couple of months ago, the company unilaterally decided to terminate the bid process and close the data room. The stock promptly dropped to about $1.20. And at that point, the new CEO, Jens Monsees, he was buying stock, as was Bart Vogel, who is chairman, and one other director.

So, we wrote about the story on the 25th of October. And if you wanna know more, companies when their share price is down heavily and they’re making a big transition often put on an investor day, and this company’s investor day is happening on the 7th of December. If you look on the ASX announcements, there’s a link that allows you to register for that. You can come in person or go online. Not an event that we’re sponsoring, but it’s always great to go to these companies when they start talking in a little more detail about what they plan to do in terms of creating shareholder value in the years ahead.

So, why do we like Infomedia? Well, U.S. private equity players are generally not fools, and they generally don’t pay top dollar. So, if this stock is under $1.20, and private equity was paying $1.70, then there’s already upside there. The second thing to like is it’s SaaS, software as a service. Businesses like that are great because the revenue is often recurring and you can count from year-to-year on business pretty much continuing as it is because the cost of renewing one subscription to a SaaS-based product is fairly low. And, of course, these businesses scale as well as a result.

Generally, Infomedia’s capital needs are light. The company was actually able to throw off free cash in FY ’22. No debt, $69 million in cash. So, they’re riding well above the death line here. And Jens Monsees, who I’ve had the privilege of meeting recently, he has a background in digital strategy in the automotive industry. He actually took charge of the digital transformation strategy for BMW back in Germany a few years ago before he moved to Australia. So, a lot to like about Infomedia.

So, what’s gone wrong? If I could put it like that. So, the stock remitted on the basis of this private equity. Then came the Annual General Meeting. Consensus had revenue for FY ’23 at $133 million. The company took a look at its accounts and decided that $127 million to $132 million was a better approximation of what the revenue line was going to be. Market reacted like the world had ended and bumped the stock down to about $1.10 or thereabouts. And, I mean, I kind of understand why the market did that. It’s a kind of shoot-first-and-ask-questions-later kind of market. But, Marc, I think you’d agree, that was a very small change in guidance to prompt that kind of reaction from the market.

Marc: Yeah. Look, they haven’t guided on EBITDA, right? So, the EBITDA impact will probably be a bit higher than that percentage-wise. But yeah, if companies flagged that, basically the market is thinking, “Well, you know, what’s happening longer-term? Is next year going to be worse as well?” So, yeah, like you said, it’s shoot first, ask questions later.

Stuart: Right. So, the fruits of it is a slight change in guidance. I’ve noticed that the EBITDA on consensus came down. We’ve got it on these latest numbers at $53 million. It was $56 million previously. So, relatively slow growth in FY ’23, compared to what the market’s expecting in ’24 and ’25, but the EV to EBITDA multiples are also low. So, I’m spotting opportunity here, as is at least part of the Infomedia board. The transition basically is from products and services through to data. Infomedia has data on an extraordinary number of cars around the world, which a number of its businesses can make use of, and players in the automotive industry can find that very valuable. So, the transition through to this company being a data company, rather than just a software company, Jens Monsees is talking about that as being transformative in terms of what he can achieve with the business. But I guess we’ll learn more from there on the 7th of December Investor Day.

Marc: Yeah. Look, and I think in terms of investing in this one, when they come out with their half-yearly numbers, which would be in February, I suspect?

Stuart: Right.

Marc: At that point, we’ll see what the growth rate is on the revenue line and also EBITDA, yeah, with a view to investing for the ’24 financial year, right? Because if you look at the growth rates, EBITDA growth rate of 6% for the current year, and then 12% for next year, compare that to the EV/EBITDA of 6.5 for this year, 5.8 for next year, on ’23, this one is fairly valued, I’d say. So, 6.5 over 6, sort of around 1, but for next year, it’s actually around 0.5, roughly speaking, and I think that’s a really attractive valuation. But in order to invest on that basis, you need to know that the company is actually achieving what it’s now saying it will for ’23, right? And the first sort of moment to measure that would be the half-yearly numbers in February.

Stuart: Right.

Marc: All right. So, let’s move on to another one that we wrote about, Stu, Healthia.

Stuart: Healthia. Really like this one. Brisbane-based company involved in various health services, but not primary care. Their business is optometry, podiatry, physiotherapy. So, all of those so-called allied health services that a lot of us have to make use of. For instance, I need regular checkups from both an optometrist and a podiatrist, so I’m two out of three there. And I imagine if next time I get too physically active in the gym, I might be in danger of using physiotherapy as well. And there’s a big slab of the population that needs these services and are willing to pay the sort of premiums the practitioners are looking for.

So, a lot of growth and some decent margins in this business. Market cap’s $180 million. FY ’22 revenue, $200 million. EBITDA, only $17 million, but part of that has to do with some impacts of COVID. Managing director is Wes Coote. And Wes was part of the team that built Greencross, which was the company that started the process of aggregating various veterinary practices around the country. So, he’s taking what he’s learned with animals, and he’s now applying it to people basically as the managing director of this company. We wrote about it in “Stocks Down Under” on the 4th of November.

Why do you like it? It’s non-discretionary spending. If these glasses break this afternoon, I’m off to the optometrist to get ’em replaced. I can’t really get around half-blind for a while and just choose to cut back because the cost of living is a bit higher. So, in that sort of non-discretionary environment, you can generally grow a good business. This company buys clinic networks then they keep the principles in place. So, they align themselves with the professionals who are working in the business.

I noted previously that Wes Coote learned a lot about the model or how to model this properly when he was with Greencross, which ultimately got taken over three years ago for $3.5 billion. So, that was a great outcome for all concerned. Plenty of room to grow here because it’s a highly fragmented business. The industry is highly fragmented, and this company has been very disciplined in terms of the multiples it’ll pay to acquire practices.

Why is it undervalued right now? Concern over resourcing. When COVID came along, it kind of played havoc with patients showing up for appointments, and equally made it difficult to staff because either the doctors or the patients had COVID. That meant that the FY ’22 numbers didn’t look as good as they should have. Feedback we’ve had from Healthia and other players is that things are more or less getting back to normal in terms of less COVID impacts on both of those things as well. Wes Coote obviously feels that way because he’s been a recent on-market buyer of stock himself.

So, FY ’22, actually wasn’t too bad, $202 million in revenue, $24.5 million at the EBITDA underlying. But here’s the big news, $111 million on clinic acquisitions. They started delivering the FY ’23 year and beyond. So, this company continues to invest in its growth. Back In Motion Healthcare Group, for instance, is one of the businesses it bought. As it buys other businesses, it integrates them. You can expect a reasonably solid growth profile in the years ahead for this one.

Market disagrees there. It’s been marking the stock back pretty much for most of this year. Part of that is the COVID effect. I think healthcare had a great 2021 and then came the reaction. But look at these kind of growth rates. You’ve got practice acquisitions translating into big earnings growth for FY ’23. And then double-digit growth in FY ’24 as well, and yet, the EBITDA margin is only single digits. So, it’s looking pretty undervalued for a company that has a lot of growth ahead of it and is beginning to attract some decent acquisition partners. So, yeah, we think investors should watch this one carefully if they don’t already own it.

Marc: Stu, I think you need to actually keep an eye on sentiment as well, right? Because you see this stock is in a downtrend, has been for a while now, and you wanna see some sort of consolidation and a break of that negativity before you jump in, I’d suspect.

Stuart: I agree. I agree. So, yeah, that’s why we’ve said that watch this one carefully. When the market takes a dislike to a stock, it often takes a long while to shake it off.

Marc: Yeah. So, all right. Good stuff. And then finally, Cirrus Networks. So, yeah, moving from health to IT, Stuart.

Stuart: Right. So, this was a recent story we wrote up in “Stocks Down Under” as well. What does Cirrus Networks do? They’re involved in managed services, basically all of the IT and telecommunication stuff at the back end of enterprises. Cirrus Networks can step up and provide that on an outsourced basis, $100 million in revenue, about $2 million in EBITDA, with a bit of a growth trajectory in front of it as the company gets its cost base down and starts to add value. Debt-free, $9.6 million in the bank, and you can get it for only $31 million in spite of that strong growth outlook. So, small company, but worth paying attention to.

Marc: I think in this case, Stu, it’s important to look at EBITDA margins as well, right? Because it’s less than 2%. And I think on average, stocks like this, managed service companies, margins are not great in that sector, right? But I think they should be higher than 2%. I think typically, it’s 3% to 4%. So, yeah, if it’s managed properly, I think you should be able to see expanding EBITDA margins.

Stuart: That’s what they’re working on. I think they’re fairly confident that margins will go up in the next couple of years. So, why do we like it? To be a decent managed service provider, you’ve got to be several things, including a Microsoft Gold Partner, which means you’ve got all the capability to work with the Microsoft tools. Also, NetApp, which is one of the cloud storage companies, so you can put all of the customer stuff up in the cloud. Blue chip clients. These things work best when they’re working with government departments and medium-sized enterprises. And then it’s always good to see a decent amount of contract flow.

So, they got one recently with Icon Water. See a few more contracts being announced like that. You could probably expect this one to scale reasonably well. Webcentral, which is a company growing in IT and telecommunication services based in Melbourne. That’s the old Melbourne IT now diversifying out. It wanted this in the tent, so it was willing to pay 3.2 cents a share for it in 2021, way under what the experts’ report came in at. The bid didn’t go ahead, so Webcentral, obviously, had to sell their stock. So, it probably points to a temporary undervaluation for Cirrus because of that big overhang that had to move.

So this could be very good. At the moment, you can get it for an EV to EBITDA multiple of about three times. And as Marc said, you wanna see the margins moving up a bit in this particular company. But a few more wins in the mid-market space is looking good. Adam Waterworth, one of their directors, has been buying stock recently. And for more information, go check out the 1st of November article that we wrote.

Marc: All right. Good stuff. Well, that’s all we have time for. Send in your questions, by the way. Every now and then we get questions through from Pete when he talks to subscribers. So, if we get through those questions, we can definitely answer ’em in one of our webinars. And in the meantime, have a good week, and we’ll see you next week.

Stuart: See you soon.