Quipt Home Medical Corp - QIPT.to

My newest position

Opening Remarks (TLDR)

I think QIPT provides a reasonable place to put some capital to work here. The business has high recurring revenue, long term tailwinds, aligned management and a reasonable valuation. As usual, there is some hair on this one which is why I think there is this opportunity. I am in belief that the market is being too short term oriented, as well the shareholder base is exhausted as seen below.

If you are feeling adventurous, have a stroll through the Stockhouse bulletin board for QIPT.

The company is listed in Canada and US under the ticker QIPT. They report in USD.

Price: $4.31 CAD/3.19 USD

Shares: 42.2 million diluted

Market Cap: 135 million USD

Enterprise Value: 190 million USD

Background

Quipt Home Medical Corp., through its subsidiaries, engages in the provision of durable and home medical equipment and supplies in the United States. The company offers nebulizers, oxygen concentrators, and CPAP and BiPAP units; traditional and non-traditional durable medical respiratory equipment and services; non-invasive ventilation equipment, supplies, and services; and engages in the rental of medical equipment. It offers management of various chronic disease states focusing on patients with heart and pulmonary disease, sleep apnea, reduced mobility, and other chronic health conditions. The company was formerly known as Protech Home Medical Corp. and changed its name to Quipt Home Medical Corp. in May 2021. Quipt Home Medical Corp. is headquartered in Wilder, Kentucky.

The company was the other part of the PHM split, which resulted in Viemed and Protech (now Quipt). Once the dust settled, VMD outperformed Protech for the first 3 years.

And VMD has also outperformed over the last 3 years.

Having said all that, I think QIPT warrants a position here.

What do they make/sell or What sets them apart?

Protech changed its name to Quipt Home Medical in early 2021.

QIPT identified themselves as the 5^th largest HME provider in the US in a highly fragmented market. They have over 1,200 employees and 125 locations. Their revenue mix is as follows:

• Sleep supplies – 33%

• Home medical – 16%

• Oxygen – 18%

• Sleep therapy – 17%

• Ventilation therapy – 11%

• Mobility – 5%

The company has 83% of revenue is recurring. This bodes well for visibility in the near and medium term for QIPT. They are exposed to competitive bidding adjustments, though they are more diversified in exposure than VMD. Here is the payor mix:

• Private insurance – 40%

• Medicare – 36%

• Private/patient pay – 18%

• Medicaid – 6%

They differentiate themselves by having more product breadth for those with respiratory needs. They offer in-home delivery and offer 1-on-1 equipment use explanation to help with compliance in use.

Growth Strategy

They have a natural tailwind in that the US has aging population. There are over 16 million in the US with COPD (and that number is growing). They plan to grow organically at 8-10% and via acquisitions. Acquisitions mainly come from geographical expansion and platform expansion. Since 2018 they have closed 19 acquisitions for over 150 million in revenue. Obviously, for this to make sense they need to acquire at less than they can raise shares at. So far, this has been the case.

The last raise was in April 2023. A total of 5.1 million shares were raised resulting in about a 14% dilution to the common. The raise was at $7.85 with net proceeds of just over 40 million. Some were upset at the raise as the share price had run well above the $7.85 mark before the raise was announced. I have mixed feelings about it. On one point this was at a discount to the market price. On another had the price was below this market price on Jan 1 that year. And it was 2021 when we were all high on our tendies and GME options. FWIW the valuation of the raise was about 7.7-7.9x EV/EBITDA. I think this gives a hint at the ceiling for valuation. They did want to pay down the debt from the recent purchase of Elm Healthcare.

Speaking of Elm, let’s take a quick look at this acquisition as it was meaningful. The price was 80 million and at a valuation of 5.2 EV/EBITDA (once integrated). They have achieved the revenue and EBITDA run rate targets post integration. This also expanded some breadth in their offerings to customers.

Recent Business Highlights

The business has essentially 80% recurring revenue and consistently post EBITDA margins more than 20%.

QIPT reported fiscal Q2 recently. The shares tumbled 14% on the following day and then another 8% the next day. The printed 6% top line organic growth and 10% consolidated growth. The business absorbed the 75/25 Medicare pricing roll off and maintained margins. The organic growth was below their long-term target of 8-10% and below analyst expectations. They mentioned they are seeing strong referrals and equipment set-ups have grown well. This bodes well for the near-term profitability.

They experienced withdrawal of Medicare Advantage members which wasn’t expected. It sounded fairly modest and they weren’t concerned it was wide spread.

As well, like other HME companies, QIPT was affected by the cyberattack at Change Healthcare. This is something that is affecting multiple companies and I am operating under the assumption that this gets solved in the next quarter or two.

They mentioned that they are looking to grow via the diabetes market, including CGMs (continuous glucose monitoring) and related supplies. Some analysts had some questions regarding this initiative, but I think it’s smart. They mentioned they are already seeing demand from existing customers, so incremental SG&A is minimal with no additional capex. It’s lower margin, but incremental ROIC should be high. It also demonstrates the conservative nature of management.

Balance Sheet

Currently the balance sheet has about 50 million in net debt. This results in under 0.9x forward EBITDA. So, there is room for some additional acquisitions or purchase of shares here.

Share Structure & Ownership

There are currently 42 million shares out. The CEO (Greg Crawford) owns 3.6% of the shares. There is a smattering of funds that add up to about 30% of the shares outstanding. Claret is the most notable owning about 10%. This equates to a 3.3% position according to TIKR.

Management & Compensation

Greg Crawford is the CEO and chair. He has been the CEO since the split from PHM. He led a restructuring plan that gave QIPT the appropriate strategic direction. He has a history of M&A deals in the healthcare space.

The CFO (Hardik Mehta) has experience with Silverstone Capital Advisors. He has been an advisor ton over 30 deals.

I really have nothing material to say about the management team here. Given the opportunity in front of them, we will see if they understand capital allocation outside the business.

Board

As mentioned, the CEO is the chair. There are 3 independent directors. In total they own 111k shares, which results in 0.2% of the common. Yes, they are also aligned with options, but I feel this amount is far too low. I have no real opinion on the board here. They seem well versed in capital markets (which is not always the case for Canadian microcaps) and operations. As such, I don’t see the board as a risk to my thesis.

Risks

• Long term impact of GLP-1 (and related) drugs with the potential to reduce COPD patients. This is a legitimate concern long term for the business. In the medium term, someone who is prescribed GLP-1 medication is likely to be prescribed one of QIPT devices as an overall treatment plan. So, in the medium term, I am not actually worried about companies like QIPT running low on patients. 

• Valuation to use stock as currency. Though I don’t think this as big of a risk to the shares as the other risks, I still think it’s worth mentioning. QIPT traditionally has raised equity to fund acquisitions. At this valuation I would not want them to do a raise. I would be fine with lower growth and buybacks. I’m assuming the market would be as well, but we don’t know that for sure.

• DOJ Investigation. So far there have been nothing official with respect to numbers of anything.

  • Quipt has disclosed that it has received a civil investigative demand from the U.S. Attorney’s Office for the Northern District of Georgia pursuant to the False Claims Act regarding an investigation concerning whether the company may have caused the submission of false claims to government health care programs for CPAP equipment.

  • The latest quarter had this in the 10-Q:

    • In April 2024, the Company received a subpoena from the U.S. Securities and Exchange Commission (the “SEC”) to provide certain documents related to the Company and the DOJ investigation, CID and financial reporting and disclosure matters (“SEC Subpoena”). According to the SEC, the investigation pursuant to which the SEC Subpoena was issued does not mean that the SEC has concluded that anyone has violated the law, nor does the investigation mean that the SEC has a negative opinion of any person, entity or security.

• Reimbursement risk from Medicaid. With most DME companies, there is a risk that the reimbursement rate from Medicaid gets cut. It has happened in the past and likely happens at some point in the future. At the moment, the regulatory environment seems friendly to QIPT but that can always change. You can’t really do much about it other than manage position size.

Valuation

The stated EV/ttm EBITDA is 3.2x and 3.1x forward. I think it’s a good idea to look at FCF for QIPT. In order to get a more realistic run rate number on FCF I took the estimated revenue with the most recent acquisitions integrated. 20% CFFO minus some average capex relative to revenue and I removed an extra expense for the servicing of their equipment loans. I took the quarterly average from the repayment of these loans from operations and didn’t worry about any repayment from acquisitions. I get just under 5x EV/FCF. This may not be the best way to look at FCF for QIPT, but it’s how I’m looking at it.

FCF excluding WC changes has been strong.

As well I think we should get a slug of capital back as the heightened receivables level due to the Change Healthcare cyberattack unwind.

My Thoughts

I think the combination of GLP-1 worry and the DOJ investigation has given me this opportunity. I would like higher organic growth, but I think QIPT still presents an opportunity with my capital. If they pivot from M&A to acquiring shares (rather than just saying they will) the share price should do well.

The sentiment is pretty poor right now among the shareholder base. I usually don’t get involved with companies that are so polarizing in the microcap space, but this feels like such a good opportunity.

Thanks for reading. If you have an opinion, please feel free to share it.

Dean

*long QIPT.to