M Partners analyst Andrew Hood is upping his target for medical equipment company Protech Home Medical (Protech Home Medical Stock Quote, Chart, News TSXV:PTQ) after Protech’s latest acquisition, saying that the stock is now trading at a substantial discount to its peer group.
In a research note to clients on Wednesday, Hood raised his target price from $2.40 to $2.80 while maintaining his “Buy” rating.
Kentucky-based Protech announced on Tuesday the acquisition of Cooley Medical Inc (CMI), a leading provider of respiratory services in eastern and central Kentucky with six locations. The purchase will expand Protech’s footprint with the company now providing services to an additional 34 counties in Kentucky, eight in Indiana and five in Virginia. CMI was bought for a total cash consideration of about $3.1 million and the assumption of about $0.9 million in debt. (All figures in Canadian dollars.)
Protech management says that CMI should increase its annual revenues by about $9 million and increase adjusted EBITDA by $1.6 to $1.9 million, bringing Protech’s annualized run-rate revenue to between $95 and $97 million and adjusted EBITDA to between $17 and $19 million.
“CMI is the type of accretive acquisition we’re going to continue to pursue given our strong balance sheet and ability to transact on larger opportunities,” said Greg Crawford, Chairman and CEO of Protech, in a press release. “These types of acquisitions are expected to significantly increase our penetration in our existing markets for marginal incremental cost and will continue to be one of our core strategies going forward.”
Hood says that this is exactly the type of acquisition that is most beneficial to Protech since it increases exposure to key markets, expands its focus on the respiratory market and was made at an attractive purchase price.
The analyst expects PTQ to close at least one more acquisition in the short term, with the company likely looking to only finance acquisitions through cash on hand and operating cash flow (management saying that it has well over $20 million in potential revenue in its pipeline), a disciplined approach, says Hood.
Hood contends that PTQ can be bought cheap.
“Looking at Protech Home Medical’s small cap peers in health care products/service distribution, the discount on both an EV/EBITDA and EV/Revenue basis is striking. This is becoming increasingly unwarranted considering its high-margin cash-flow positive business model, and its financial and operational flexibility to acquire small businesses for rapid revenue growth. We also note that shares were trading above $1.00 prior to the cyber-theft in May. We believe that Protech should trade closer to the peer average of 12.6x on an EV/EBITDA multiple basis,” Hood says.
Hood says that an aging population and increasing prevalence of chronic illnesses in the US should support more than five per cent in annual growth in demand for durable medical equipment (DME) over the next ten-plus years. The analyst says that with Protech’s size, it stands as one of the few companies capable of acquiring smaller regional operators as the field of DME distributors consolidates going forward.
His increased target of $2.80 was prompted by the additional EBITDA coming from the CMI acquisition and represents a projected 12-month return of 226 per cent at the time of publication.