Protech Home Medical is made for this crisis, M Partners says

M Partners analyst Andrew Hood already had a bullish target on Protech Home Medical (Protech Home Medical Stock Quote, Chart, News: TSXV:PTQ), but the COVID-19 crisis has strengthened his conviction in the company, the analyst says.

In a research update to clients today, Hood maintained his “Buy” rating and one-year price target of $2.30 on Protech, a figure that implied a return of 167 per cent at the time of publication.

On March 18, Protech issued a press release outlining its early response to the crisis, noting that it was an essential business and saying it was “on the front lines of ensuring that our at home care ecosystem.”

These are unprecedented times,” CEO Greg Crawford said in the release. “We are working diligently to meet the needs of our tens of thousands of patients with a robust and dependable supply chain. I am happy to report today that our supply chain remains stable with sufficient inventory, and our suppliers have confirmed that placed and forecasted orders are currently intact. Furthermore, we are also currently receiving an increase in enquiries from our referral network that are actively seeking to rapidly discharge patients from in hospital care to home care as institutions work to free up hospital beds in preparation for a potentially worsening pandemic situation. We have also been accelerating inventory purchases to safeguard against any potential future supply chain weaknesses and meet potential increased demand. Our balance sheet remains very strong to support us through these unprecedented times.”

Hood said Protech Home Medical is helping ease the burden on hospitals during the coronavirus crisis.

“As indicated on its first business update on March 18, Protech is part of a critical infrastructure industry,” the analyst commented. “Thus operations have largely continued at a normal – or in some cases accelerated – pace. PTQ’s position in the healthcare system offers hospitals the ability to free up capacity by sending patients home for health care needs when possible. While Protech is not selling directly to hospitals, it is using its referral network and existing patient base to expedite the shift from hospital to home care for patients unaffected by COVID-19. To meet this influx in demand, Protech has accelerated its purchases of respiratory equipment in particular, with no issues in receiving orders despite indicated shortages of ventilators in the United States. On April 13, another press release indicated that the uptick in demand had continued, and we believe that demand for some products may be up over 30% vs. last year (offset by declines in some business like sleep labs). To support the expanded inventory purchases, PTQ received a C$1.5M grant as part of the CARES Act Provider Relief Fund. In the same time frame, the Centers for Medicare and Medicaid Services (CMS) removed non-invasive ventilators from the 2021 Competitive Bidding Program to facilitate patient access. These products were to be included in the bidding program for the first time after this past year’s hiatus, and the addition would have pressured margins on those products. Ventilators in total account for 17% of Protech’s revenues. The vast majority of these revenues are from non-invasive ventilators, though Medicare/Medicaid is not the only payor.”

Hood thinks PTQ will post EBITDA of $19.0-million on revenue of $96.0-million in fiscal 2020. He expects those numbers will improve to EBITDA of $24.0-million on revenue of $110-million the following year.

“Amidst a very challenging environment, we believe PTQ’s position has only strengthened, and it will emerge with a more attractive balance sheet,” the analyst added. “Further, we also anticipate that once conditions stabilize, Protech will be able to find even more appealing terms for potential acquisition targets. We also believe that the COVID-19 pandemic has alerted the wider public to U.S. hospitals’ capacity issues and the importance of administering home health care when possible. This situation could cause a wider, accelerated shift to home care in which Protech would stand to benefit. We also anticipate that the mass production of ventilators to treat COVID-19 will result in an oversupply once the pandemic subsides, and could push prices down for future inventory purchases.

But the analyst said the stock has not yet responded the same way the company has.

“Despite it’s enviable positioning in the currently uncertain economic environment, Protech continues to trade very cheaply relative to peers at 4.9x our 2020 EBITDA estimate and 3.9x 2021 EBITDA,” he noted. “As the business approaches a $100M run-rate on revenues, with the balance sheet to make meaningful acquisitions, we do not expect the valuation discount to persist. We are maintaining our BUY recommendation and $2.30 target based on 9.0x 2021 EBITDA.”