Protech Home Medical Corp (TSXV: PTQ) is the United States-headquartered healthcare service company. The company provides in-home monitoring and disease management services, including end-to-end respiratory solutions for patients in the United States. It seeks to continue to expand its offerings to include the management of several chronic disease states focusing on patients with heart or pulmonary disease, sleep disorders, reduced mobility, and other chronic health conditions. The primary business objective of the company is to create shareholder value by offering a broader range of services to patients in need of in-home monitoring and chronic disease management. The company's organic growth strategy is to increase annual revenue per patient by offering multiple services to the same patient, consolidating the patient's services, and making life easier for the patient.

Investment Rationale

• COVID-19 Spike Fanning Growth: As the Coronavirus pandemic continues to evolve, the company observed a strong demand for its products and its performance improved significantly. Further, the company’s supply chain remained uninterrupted amid the current pandemic. The company is witnessing an increased demand for respiratory equipment, such as ventilators, and oxygen concentrators. The company's CPAP resupply and other supplies business remained very strong and Sleep business gained strength in the 2nd half of the third quarter. Further, as several US states have witnessed a spike in COVID-19 cases, the company has taken the necessary steps to plan, prepare and respond to the 2nd wave of COVID-19 cases. Moreover, the company's supply chain for critical equipment remains stable, and the company has sufficient inventory to meet the rising demand. Further, the company will be looking to opportunistically build inventory for ventilators and home oxygen equipment.

• Improved Financial Performance: As the third quarter preliminary numbers suggest, the company continued to build on the solid second-quarter performance. The company's revenue is likely to grow in the range of 21% to 23%, while adjusted EBITDA is likely to grow in the range of 36% to 41%, which is impressive. During Q2FY20, the group's EBITDA margin improved by 110bps to 20% and substantially above its industry peer's median of 11.2%. The company reported a net profit margin of 8.5% in the Q2FY20 against a negative net profit margin reported a quarter before period. Return on Equity stood at 10.8%, significantly higher against the industry median of 2.4%. Further, in the preliminary result update for the Q3FY20, Chief Financial Officer, Hardik Mehta said that revenue continues to accelerate at a significantly higher rate than the industry, and Adjusted EBITDA margins are tracking higher.

• Bullish Price Trend: At the last closing price of CAD 1.14 (July 28, 2020), PTQ shares traded well above the crucial long-term and short-term support level of 200-day, 100-day, 50-day, and 30-day daily moving averages, which typically considered as strong favourable price trend in an underlying. The Price to 200-day SMA ratio stood at 1.19, which implies that at the last traded Price, PTQ shares ended approximately 19% above its 200-day SMA. This shows that its shares are trading considerably above its long-term support prices, which makes the prevailing trend stronger. Further, average daily traded volume over the last 100-days is approximately 45% above the average traded volume over the last 200-days and prices are moving upward, reflects a higher delivery interest in the stock. Also, the Moving Average Convergence Divergence (MACD) line is hovering above the 9-day signal, and the difference between 12-day Exponential Moving Average (EMA) and 26-day EMA is positive another positive indicator. 

• Risk Associated to Investment: Sharp reduction in COVID-19 cases could have an impact on the group's performance on the company's performance in near-term. Any disruption in the group's supply chain due to growing COVID-19 cases could also have a weigh on the group's financial performance. Further, the company’s long-term debt contribution in the total capital is relatively higher at 39.8% against the industry median of 29.2%, which implies a higher balance sheet risk for the company.

Preliminary Third Quarter 2020 Results Highlights

Protech Home Medical announces Record Preliminary Third Quarter 2020 Results which signify the strength and resiliency of the company’s underlying business. In the preliminary statement, the company reported that revenue for the Q3FY20 would be in the range of CAD 25.6 million to CAD 25.9 million, which would be 21%-23% higher on a YoY basis. Further, adjusted EBITDA is expected to be in the range of CAD 5.3 million to CAD 5.5 million, which implies a growth in the range of 36% to 41% on a year-on-year basis. The company also reported that the gross margin for the third quarter of 2020 would be the same as reported in the second quarter of FY20 (73%).

The preliminary third-quarter results signify the strength and resiliency of the underlying business, which continued to be robust. Further, the company continue to see strong momentum across its business in the third quarter and seeing overwhelming industry tailwinds which bode well for the company over the near and longer-term. Further, the company is leveraging its excellent infrastructure and strongest financial position in its history to aggressively enhance its market share through inorganic and organic growth opportunities.

Key Takeaway from Q2FY20

In the Q2FY20, the company posted strong financial performance, with revenue, surged by 16% on a YoY basis to CAD 24.1 million. The strong growth was backed by a 28% surge in customer base on a YoY basis to 40,372 unique patients from 31,464 unique patients served in Q2 2019. With the help of company’s continued use of technology and centralized intake processes, respiratory resupply set-ups and deliveries increased 20% to 13,980 for the three months ended March 31, 2020, compared to 11,641 for the same period of the previous year.

Gross margin improved by 2 percentage points to 73% as a result of ongoing margin enhancement efforts, including patient intake and distribution optimization. Adjusted EBITDA for the quarter under review bolstered to CAD 4.9 million and margin improved to 20.4% from adjusted EBITDA of CAD 3.8 million and a margin of 18.2% reported in a year-over period, respectively. Net Income for Q2FY20, stood at CAD 1.6 million as compared to a loss of CAD 0.5 million reported a year over period. At the end of the Q2FY20, the company had CAD 6.2 million of cash on hand.

Stock Performance   
At the closing (July 28, 2020), PTQ shares traded approximately 0.88% higher at CAD 1.14. In a year-over period, its shares have tested a 52w high of CAD 1.35 on June 01, 2020, and a 52w low of CAD 0.47 on March 17, 2020. At the last traded Price, its shares traded approximately 142% above its 52w low price level and nearly 16% below its 52W high price level, which reflect that the stock has had sharp run-up after March 19, 2020 bottom price level.

1-Year Price Performance (as on 28^th, July 2020, after the market close). Source: Refinitiv, Thomson Reuters.

On a YoY basis, its shares have surged approximately 46% and outperformed the benchmark index by 50% in the same time. The stock bagged ~ 18% on a year-to-date basis and beat the benchmark index by 24% in the same time. Further, the stock gained ~33% over the past three months and relatively beat the benchmark index by 22% in the same time.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together form around 19.1% of the total shareholding. Claret Asset Management Corporation and Gregory J Crawford hold the maximum interests in the company at 8.10% and 5.68%, respectively. Further, six out of top-10 shareholders have increased their stake in the company over the last three months, with Claret Asset Management Corporation and Gregory J Crawford are among the top investors in the company that have increased their stakes by 6.81 million and 0.87 million, respectively. The institutional ownership in the PTQ stood at 10.38%, and ownership of the strategic entities stood at 8.7%.

 Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV/Sales based Valuation Metrics

Note: All forecasted figures have been taken from the Thomson Reuters.

Stock Recommendation: The company reported two consecutive quarters of strong financial performance and trend is expected to continue in the near to medium term. Also, the management of the company stated that they continue to see strong momentum across their business in the third quarter and seeing overwhelming industry tailwinds which bodes well for the company over the near and longer-term. Further, Revenue continues to accelerate at a significantly higher rate than the industry, and Adjusted EBITDA margins are tracking higher. PTQ's cash conversion cycle for the second quarter of the financial year 2020 stood at 10.4 days, considerably lower than the industry median of 27days. This ensures better liquidity amid challenging times.

Also, its shares have significantly outperformed the benchmark index by 50%, 22% and 24% on a YoY basis, YTD basis and 3-Months, respectively, which reflects more muscular relative strength in its shares against the broader market. Also, its shares are hovering in a bullish price trend with its shares traded well above the long-term and short-term support levels of 200-day, 100-day, 50-day and 30-day simple moving averages.

However, the company’s long-term debt contribution in the total capital is relatively higher at 39.8% against the industry median of 29.2%, which implies a higher balance sheet risk for the company. Also, a sharp recovery in COVID-19 cases could have a significant weigh on the group’s performance in near-term.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Speculative Buy” recommendation on the closing price of CAD 1.14 (on July 28^th, 2020, after the market close), with lower double-digit upside potential, based on the NTM Industry Peer’s Average EV/Sales multiple of 1.58x on the FY21E Sales. We have considered Hamilton Thorne Ltd, Greenbrook TMS Inc and HLS Therapeutics Inc etc., as a peer group.

*Recommendation is valid at July 29, 2020 price as well.

Disclaimer

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