Continuing with my theme of poor share price performance in 2021....
Way back here I chatted about Viemed.
Since then the shares have performed poorly on an absolute and relative basis. It's a free site for a reason. The OIG investigation, covid uncertainty, and questions about future growth and profitability have left VMD behind the market.
I thought I would give some quick updates and my thoughts on the company today. As well seek opinions on where to get my team #neversell tattoo removed.
Why did shares perform so poorly in 2021?
The OIG Investigation
In May of 2021 the OIG completed an audit of 100 VMD sampled claims. They found that 98 of the 100 did not meet requirements. Of course, VMD disagreed and issued their own response.
I spent quite a bit of time trying to understand how impactful this is relative to the position of the company in the marketplace. The investigation is nuanced to say the least. There is a long history of findings with other companies. Regardless of the validity of the claims, this has left investors uncertain about VMD.
The potential amount owing to OIG currently stands at 9 mil. There is no certain timeline for resolution. Best case could be a formal resolution in 2021, but it could take a couple of years. To be safe I have removed the entire 9 mil from the cash pile of VMD.
Covid Impact
The base business of VMD was hit hard from the immediate impacts from covid. Since they have a high touch service model and market to doctors in the hospital setting, they seen a sharp drop in activity. Couple this with the low visibility on what the impacts of the virus (and subsequent lockdowns) would be led to some uncertainty.
VMD did respond quickly with some vent sales and performing covid related contact tracing throughout the pandemic. VMD is one of the companies the seen revenues grow initially during the pandemic due to covid related work (mainly contact tracing and vent sales) and is slowly transitioning back to base business. Although, the different variants have taken the wind out of the sails a few times.
They now screen poorly as it appears the business shows lower 2021 revenue vs 2020. As we move forward they will show revenue growth again. It's important to note that the core business has posted the highest quarterly revenue for the base business ever in Q4 2021.
Margin Compression
As VMD sees the longer term opportunity, they began hiring personnel (mainly RTs and sales reps) to meet anticipated demand. They really started getting aggressive in 2019 and have tried to continue this trend. With the lower activity during the pandemic and higher costs, EBITDA margins have came down from mid to high 20% range, to below 20%. They have since stabilized at just under 20%. I am anticipating increased EBITDA margins in 2022.
Delays in other areas
A few years ago VMD announced a contract in late 2018 with the Veterans Administration that hasn't brought in as much revenue as originally anticipated. Though they continue to work through delays, investors likely have low expectations from this now.
Though VMD has acquired an interest in VeruStat, I believe that investors were expecting an acquisition to launch them into a new vertical.
Competitive Bidding
Non-invasive vents were officially removed from the competitive bidding process that was set to begin in 2021. This does not mean that NIV are out of the woods and this is likely the biggest (or among the biggest) fears for investors in this company.
Something that should be noted is that the Medicare reimbursement rates are indexed to CPI, so there is at least a partial inflation hedge built into the business.
Phillips vent recall
This is just another small data point that doesn't help things. In June of 2021, Phillips voluntarily recalled some ventilators. This created a fair bit of disruption in the industry creating a shortage of sleep equipment. VMD did have some Phillips vents and did have to have some replaced. VMD was not materially impacted as they are device agnostic although these types of things can cause investors to lump all the potentially affected companies together.
Summary
This all adds up to a bunch of noise for VMD. Despite all this, VMD has grown core business revenue, vent patients, and have diversified their business. With the recent run in share price after Q4 2021 results, they are now trading around 6x EV/est 2022 EBITDA and less than 1.5x rev. They have traditionally traded at 8-12x EBITDA. This is similar to peers, so there is valuation compression on more than VMD. Regardless, I feel that the earning potential of the business has not changed over the long term.
Recently Owens & Minor announced that they will acquire VMD peer Apria for 1.45 billion for the equity and a total cost of 1.6 billion. This is about 25% above the previous day's trading. It equates to a little under 6x estimated 2023 EBITDA.
VMD has also recently launched 2 new initiatives that will be meaningful to the business in 2022 and beyond.
Viemed Clinical Services, a behavioral health division supported by their remote monitoring platform is seeing increased NIV patient compliance.
Viemed Healthcare Staffing, a staffing platform that supports internal staffing needs and generates revenue from external projects.
The way I look at VMD is that they have demonstrated an ability to convert EBITDA to to CFFO. EBITDA has historically been less than CFFO. The business is somewhat capital intensive and one needs to consider this if the primary thesis revolves around growth. If they manage to hit the 30 mil in EBITDA that has been estimated for 2022, then they should see 40-45 mil or so in CFFO before investing in working capital. Removing cash expenses and making some estimates on growth vs maintenance capex, I get 20-30 mil in cash they are generating. Current EV is 190ish mil if you remove all the potential liability from the OIG investigation. This doesn’t include some dilution through compensating employees via equity. Though it hasn’t been a huge dollar amount for VMD, one should either expect some of the NCIB to just be offsetting dilution or expect the outstanding shares to creep up.
I have been a holder of VMD when they could do no wrong and when investors felt like they are doing everything wrong. I believe 2022 is setting up to be a good year for VMD.
Anyone else hold VMD? Anyone? Bueller?
Dean
*the author is long VMD and has endured pain along the way