Protech Home Medical gets “Buy” rating from Industrial Alliance

A market-leading provider of durable medical equipment which is well-positioned to grow
via acquisitions — that’s the scuttlebutt on Protech Home Medical (Protech Home Medical Stock Quote, Chart, News TSXV:PTQ), says Industrial Alliance Securities and analyst Chelsea Stellick, who on Wednesday launched coverage of PTQ with a “Buy” rating and $2.40 target price.

Formed in 2017 from the division of Patient Home Monitoring into Viemed Healthcare and Protech, PTQ has a diverse range of equipment and services offered to patients in the US, including end-to-end respiratory options as well as power mobility, equipment, sleep apnea machines and distribution and telehealth systems, all for the home care market.

Oxygen therapy, sleep therapy, ventilation therapy and PAP therapy each represent about a fifth of the company’s product mix, while its payors are made up of roughly 40 per cent medicare, 38 per cent private insurance, 12 per cent Medicaid and 11 per cent private and patients.

In her report, Stellick said that the durable medical equipment (DME) market in the US is currently highly fragmented with over 6,000 providers, 70 per cent of whom have annualized revenues below $15 million. That makes for ripe grounds for picking by PTQ, which has a track record of immediately accretive acquisitions and a strong M&A team.

Stellick also points to demographical stats in PTQ’s favour, saying, “There is a strong and growing demand for DME due to an ageing population, a patient’s preference to be at home, and the increasing prevalence of chronic diseases requiring long-term care. More specifically, the DME market is expected to grow at an ~5.6 per cent CAGR before reaching US$98.4 billion by 2028, up from US$54.9 billion in 2018.”

“This supports management’s target of three to five per cent organic growth per year. However, PTQ believes that it can grow at six to ten per cent by including strategic acquisitions and additional product lines within its existing markets,” she said.

In comparative terms, Stellick estimates PTQ to be trading at a discount to its peers at about 5.0x 2020 EV/adjusted EBITDA versus its peer average at about 11.0x.

“We believe the discrepancy is unwarranted given management’s strong track record of successfully increasing each acquired businesses’ EBITDA margin, its strong recurring revenue model, and its aggressive growth trajectory to achieve +$200 million in revenue and a 25 per cent EBITDA margin in three to five years. As such, we think that Protech should trade closer to its comparables on an EV/Adj. EBITDA multiple basis (currently ~11.0x), which is why we use an 11.0x multiple for our valuation.”

The analyst has forecasted PTQ to earn adjusted EBITDA in fiscal 2020 of $19.1 million on revenue of $97.0 million and adjusted EBITDA in fiscal 2021 of $20.4 million on a top line of $107.2 million. At the time of publication, Stellick’s $2.40 target represented a projected 12-month return of 179.1 per cent.

PTQ finished 2019 up 62 per cent, while so far in 2020 the stock is down five per cent.