Viemed Healthcare Inc. (TSX: VMD) is a provider of equipment and home therapy to patients with respiratory disease, oxygen problems, sleep apnea and PAP treatment. The company also provides services to neuromuscular patients.

Key Updates:

• Lucrative macros: Due to the rising aged population (above 65 years) in the recent past, the US health care industry is witnessing an increase in the number of people qualifying for the Medicare scheme. Also, the business model of the firm depends on monthly rental fees, which are reimbursed by insurance and covered under the Medicare scheme. Notably, medical expenditure is expected to grow by 6% CAGR from USD 58.3 billion in 2019 to USD 98.4 billion in 2028. Moreover, the durable medical equipment (DME) and post-acute respiratory healthcare services within the U.S. are likely to remain attractive as patients are choosing effective in-home treatment with clinical practitioners. Being one of the leading providers of durable medical equipment (DME), we believe VMD is highly poised to take advantage of the upcoming opportunities.

Industry scenario of Durable medical equipment (Source: Company Presentation)

• Growing healthcare service need for COPD patients: The company caters to patients who are suffering from Chronic Obstructive Pulmonary Disease (COPD) across the U.S. In the recent past, the industry is witnessing an increase in the number of patients who are suffering from the above respiratory disease. Notably, the industry has already spent USD 50 billion of annual healthcare costs on COPD, which would subsequently support the company’s upcoming performances in the coming days.

• Implementation of Technology for better outcome: The group is investing in the research and development segment to enhance the company’s technology and remote care segment. The above would subsequently boost the company’s therapy and counselling service, which is a key positive. Moreover, with the improved remote workflow process, the group is witnessing higher efficiency from its clinicians and resulting to proactive care patient engagement and improved customer satisfaction.

• Increase revenue from the rental segment: The group derives its majority revenue from the rental segment (~85%), and reported improved performance under this, which is a key positive. Notably, in 9MFY21, the company reported 9% y-o-y growth in rental income at USD 71.795 million, supported by improved performance from both Ventilator rentals and Other durable medical equipment rentals. Considering the current industry dynamics, we believe the above momentum would likely continue in the coming days.

• Technical showing positive signal: On a daily price chart, the VMD stock closed above its 50-days and 20-days simple moving average, which reflects a bullish signal and possibility of an up move in coming trading sessions.

Technical Price Chart (as on November 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Industry beating margins: The company is commanding higher margins against an industry, which indicates improved operational efficiencies. Notably, in Q3FY21, the company reported gross margin and EBITDA margin of 62.8% and 20.3%, respectively, higher than the industry median of 33.4% and 14.6% respectively. The corporation also recorded higher net margin at 6.1% compared to an industry median of 3.8%, in a same period.

• Improved liquidity: The company reported its quick ratio and current ratio at 2.22x and 2.34x, respectively, in Q3FY21, significantly higher than the industry median of 1.21x and 1.55x, respectively. The above indicates better working capital management and illustrates that the company is able to fund its short-term liability through its current assets. Moreover, the company has a lower cash cycle conversion of 13.5 days, as compared to the industry median of 32.1 days. The above indicates that the group is efficient to convert its investments in inventory and other resources into cash in a quicker manner. 

Q3FY21 Financial Highlights:

• Slide in top-line: In Q3FY21, the company reported its revenue of USD 29.285 million, as compared to USD 33.447 million in pcp. The decline was primarily due to significantly lower income from the COVID-19 response sales and services segment (USD 1.452 million v/s USD 8.553 million in pcp). However, the company reported improved revenue from all other business segments.
  

• Marginally lower gross profit: The company reported a marginally lower gross profit of USD 18.381 million versus USD 19.453 million in pcp, due to lower revenue, partially offset by a decline in cost of revenue.
  

• Decline in income from operations: The quarter was marked by significantly higher research & development costs and an increase in stock-based compensation cost, while a decline in the selling, general & administrative partially supported the profitability. The company reported its income from operations at USD 2.919 million, as compared to USD 4.040 million in pcp.
  

• Decrease in net profit: In Q3FY21, the company reported its net income of USD 1.789 million, as compared to USD 2.804 million in pcp. The decline was primarily due to lower income from operations coupled with higher provision for income taxes, partially supported by lower net interest expense.

Source: Company

Risks: Reimbursement for the services provided by VMD comes from governmental healthcare programs, such as Medicare and Medicaid, private health insurance companies, etc. Hence, the reimbursement rates offered are controlled by the regulatory bodies, and any reduction in the reimbursement rates might dampen the company’s income and margins.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 47.70% stake, Thrivent Asset Management, LLC, and CI Global Asset Management are the major shareholders in the company with an outstanding position of 8.99% and 5.87%, respectively.

Source: Refinitiv

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

The company is prioritizing to enhance its active patient base through entering new target states by geographic expansion. Moreover, the group is also focusing on expanding its service offerings and home-based product offerings to service additional disease states. The above is likely to result in organic growth for the firm in the coming quarters. Furthermore, net revenues for the fourth quarter of 2021 are estimated to be approximately USD 29.3 to 30.5 million. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Nova Leap Health Corp, Ontrak Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of VMD at the last traded price of CAD 7.55 on November 09, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached

One-Year Technical Price Chart (as on November 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 10, 2021 price as well.

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