One Small Cap Healthcare Stock to Hold- VMD

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.

• Robust profitability margins: The company is commanding higher margins against an industry, which indicates improved operational efficiencies. Notably, in FY21, the company reported gross margin and EBITDA margin of 62.7% and 19.9%, respectively, higher than the industry median of 31.3% and 13.4% respectively. The group also recorded higher net margin at 7.8% versus the industry median of 3.6%.

• Growing healthcare service requirements for COPD patients: The company caters to patients who are suffering from Chronic Obstructive Pulmonary Disease (COPD) across the U.S. Recently, the healthcare industry is witnessing an increase in the number of COPD patients, while the industry has already spent USD 50 billion of annual healthcare costs on COPD. We believe the trend is likely to continue in the coming days and would subsequently support the company’s upcoming performances in the coming days.

• Update on Share purchase program: On March 08, 2022, the Board of directors has authorized and approved a share repurchase program on Nasdaq. The company is planning to repurchase up to 1,984,014 common shares of the Company through open market purchases, block purchases or otherwise in accordance with applicable securities laws.

Risks associated with the investment:

 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. 

 FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• In FY21, the company reported its revenue of USD 117.0 million, versus USD 3 million in FY20. The decline was primarily due to significantly lower income from the COVID-19 response sales and services segment (USD 8.5 million v/s USD 34.3 million in FY20). However, the company reported improved revenue from all other business segments.
  

• The company reported a lower gross profit of USD 4 million as compared to USD 80.1 million in FY20. This was due to lower revenue, partially offset by a decline in cost of revenue.
  

• The quarter was marked by significantly higher research & development costs coupled with a surge in the selling, general & administrative costs. Hence, income from operations declined to USD 11.5 million from USD 7 million in FY20.
  

• The group reported its net income of USD 9.1 million, as compared to USD 31.5 million in FY20. This was primarily due to lower income from operations as mentioned above couped with a provision for income taxes amounting USD 3.3 million v/s an income tax benefit of USD 5.1 million

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported a lower cash conversion period of 26.3 days in FY21, as compared to the industry median of 30.7 days. This indicates that the company lakes lower time to convert its investments to cash flows.  We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Electromed Inc, Premier Health of America Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of VMD at the last closing price of CAD 6.35 on March 28, 2022.

One-Year Technical Price Chart (as on March 28, 2022). Analysis by Kalkine Group

Disclaimer

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