Quipt Home Medical is still a Buy, says iA Capital

iA Capital Markets analyst Chelsea Stellick is staying bullish on Quipt Home Medical (Quipt Home Medical Stock Quote, Charts, News, Analysts, Financials TSXV:QIPT), maintaining a “Buy” rating and target price of $13.40/share in an update to clients on Wednesday.

Headquartered in Kentucky, Quipt Home Medical (previously known as Protech Home Medical) provides in-home monitoring equipment and disease management services including end-to-end respiratory solutions for patients in the United States.

Stellick’s latest analysis comes after a Class I recall was issued for specific ventilators, BiPAP, and CPAP machines made by Philips Respironics, which partially supplies Quipt.

“Although QIPT had enough inventory to buffer the supply squeeze in July-August, the recall has since begun to weigh on its ability to meet strong demand, resulting in a backlog for the first time ever,” Stellick noted. “Although Philips machines continue to be subject to allocation, QIPT is less impacted than other providers as Philips ventilators make up less than 20 per cent of its inventory, thereby sheltering the impact to a small percentage of its overall business.”

The recall applies to sleep and respiratory care machines made between 2009 and April 26, 2021 on account of sound abatement foam being susceptible to degradation, and Stellick notes that Philips will take approximately one year to complete the repair and replacement programs.

“Philips has been a fantastic partner to us over the years, and we are committed to working through the recall united together,” said Greg Crawford, CEO and Chairman of Quipt in the company’s August 23 press release. “As it relates to our supply chain, it is worth noting, Philips represents a minority percentage of the impacted category for us, and we have not experienced any material impact to date. The Quipt clinical team has done an excellent job working with patients and physicians to manage this complex process and we will continue to work diligently to minimize any future impact. Our focus on delivering superior patient care positions us well to drive future growth.”

Though Quipt has largely navigated the recall to this point, Stellick notes that the company’s competition is in many cases being hit much harder, with the disruption in the supply chain potentially leading to opportunities for Quipt.

“Many of QIPT’s smaller competitors rely exclusively on Philips for ventilator supply, which means these competitors have been crippled by this unexpected recall,” Stellick said. “This opens a twofold opportunity for Quipt, firstly to gain market share from these disadvantaged operators that cannot service customers in an acceptable time frame, and secondly to acquire small competitors at distressed multiples.”

Quipt took a step on the acquisition front in August, officially closing the purchase of an unidentified business with operations in Missouri to add three locations, 15,000 active patients, 1,500 unique referring physicians, insurance contracts and decades of operating experience to its portfolio to help the company quickly expand its operations in the state.

Though Stellick believes the company will emerge in a stronger competitive position, she has adjusted her short-term financial metrics for the company, lowering her revenue target to $101.8 million for 2021 (previously $103.9 million; all financial report figures in US dollars), which still represents a potential year-over-year increase of 32.6 per cent; her 2022 revenue projection is now $129.9 million (previously $134 million), marking a potential year-over-year increase of 27.6 per cent.

Stellick’s EBITDA projections have also dropped slightly, with a revised 2021 estimate of $21.1 million (previously $22.1 million) producing a potential margin of 20.7 per cent, while her 2022 estimate is now $28.6 million (previously $29.5 million) to yield a potential margin of 22 per cent.

The revised estimates also cause a slight shift in some of the company’s key trading multiple estimates, with Stellick projecting a jump in the EV/Revenue multiple from 1x in both 2019 and 2020 to 1.8x in 2021, then settling down to 1.4x in 2022. Meanwhile, Stellick’s projection for EV/EBITDA is set to drop to 8.8x in 2021 from 11.4x in 2020, followed by a further dip to 6.5x in 2022.

Overall, Stellick believes Quipt is in an advantageous growth position despite the recall’s effect on financial forecasts.

“QIPT’s inventory position going into the summer and diversified supplier base will ensure the impact to financials is not material, since sales lost in Q1/F22 will simply be deferred to Q2/F22 as the customers in the backlog have nowhere else to go,” she said. “Moreover, heavily impacted smaller competitors may allow Quipt to scoop up inexpensive tuck-in acquisitions or gain market share.”

Overall, Quipt’s stock price is up 14.2 per cent for the year to date, though it has settled down after reaching a high point of $10.08/share on February 10. At press time, Stellick’s $13.40 target represented a projected one-year return of 88.2 per cent.