This morning, Centric Health announced it had reduced its debt by a further $30-million because LifeMark Health LP, an affiliate controlled by Centric had redeemed preferred partnership units issued and outstanding to Alaris Income Growth Fund Partnership. Management noted that it has now reduced its outstanding debt by a total of $194.3-million, and that its outstanding debt as at March 4, 2016, was $120.5-million and net debt was $82.9-million.
“The deployment of more than $194-million towards debt reduction since the beginning of the year is a truly transformational event for our company,” said CEO David Cutler. “Combined, the unit redemption and note purchase have dramatically improved our leverage ratio and reduced our annual interest expense, while simplifying our balance sheet considerably. Looking ahead, we have the balance sheet strength and financial flexibility going forward to meaningfully invest in the growth of our businesses through both organic opportunities and prudently acting on accretive acquisition opportunities that will drive near-term EBITDA and cash flows, while continuing to pare down debt, with a target of less than 4.0 times debt to EBITDA in the medium term.”
Loe says that while debt reduction is not always the most prudent use of cash, it almost certainly is for Centric Health, whose 2014 debt/EBITDA ratio was more than 10x and interest expense actually exceeded EBITDA. The analyst says the moves bring the company some welcome flexibility.
“Mitigating financial risk clearly positive not just to near-term free cash flow generation, but also to financial flexibility for future transactions,” says Loe. “We would be contrarian in the extreme not to regard debt reduction as being positive to an entrepreneurial firm like Centric, one for which future growth-by-acquisition is core to our investment thesis. Accordingly, enhancing financial flexibility through financial cost mitigation is unambiguously positive in our view, and particularly so when considering the effective interest rate relevant to legacy Alaris debt now redeemed.”
In a research update to clients today, Loe maintained his “Buy” rating and one-year price target of $0.70 on Centric Health, implying a return of 192 per cent at the time of publication.