Potential MicroCap Deep Value Play (HLTH)

99 1
($ in Thousands)

Its been a while since I've written an idea about an equity play. Recently its been mostly futures or commodities , and I believe most of that is due to the difficulties I am running into when trying to find value. Luckily, I don't have any set parameters to search for value, which means I can look in the Micro Cap space, a space that I believe isn't utilized enough by investors (with no fault to their own in terms of AUM sizes). Such a stock came across my radar recently, Nobilis Health Corp, so I thought I would investigate it to see if there's any puffs left in the cigar.

What is HLTH? Nobilis Health Corp is a full-service healthcare development and management company, with 25 locations in seven states, including 4 hospitals, 10 ASCs and 11 clinics. In addition, it partners with another 38 facilities across the country. Northstar Healthcare, Inc. partners with the physicians in the development and management of ambulatory surgery centres in the United States. It manages an ambulatory surgery centre in Dallas and two pain management clinics in Houston. It's a $100M Market Cap sized company and has fallen 70% over the last year.

So what is there to like about HLTH? For starters, its trading 0.71 times Book Value, 0.35 times Sales, and 18 times earnings . HLTH reported its 1Q17 results and the consensus was positive. Although HLTH still reported a net loss of $2.4M, it was well below the net loss of $5.0M that they suffered in the same quarter last year. Secondly, revenues were up 33% compared to same quarter last year, coming in at $68. 3M . Adjusted EBITDA came in at $2.0M, an increase of 473.5% compared to same quarter last year. In terms of expenses, those only grew 17% since same quarter last year, so a net increase of 16% revenues after expenses. Diving into the Income Statement, the increased revenues is mostly due to increases in Patient and Net Professional fees, something which should only grow further given the new acquisition of Hamilton Vein Center in Houston.

Moving over to the balance sheets, HLTH increased assets by $3,000 and increased total liabilities by $4,000, however, the ratio still remains favorable as Total Assets sit at $308,161 versus Total Liabilities of $153,882.

Cash flow statements also show positive momentum from previous years' quarter. Net Cash Provided by Operating Activities increased from $4,462 1Q16 to $16,532 in 1Q17, a net increase of $12,070. Net Cash Used in Investing Activities also increased (most likely linked to the acquisition of Hamilton Vein Center) from $1,984 to $11,389. Finally, HLTH was able to increase their cash position QoQ from $16,224 to $31,166.

With the acquisition of Hamilton Vein Center, I wanted to look deeper to see what the ramifications of that buyout were. I want to see a company make a strategic purchase that has value immediately upon purchase, not something that takes years to offer value back to the buyer. Total assets acquired from the purchase of Hamilton Vein Center came in at $14,709, with total liabilities assumed at a mere $1,591, that's a great ratio.

The biggest red flag will be the debt, and how HLTH manages to handle the debt. If they can handle their debt and use it to propel their business, the share price should appreciate accordingly. Right now I like the valuation given its book value, as the current price sits at a 26% discount to book value, and a 64% discount to its sales. I would enter around the 1.50 range, signaling a break from the bearish wedge setup we have now. The stop loss would be put in around 0.90.

If you have a counter idea, or you see things in the analysis that I am missing, please let me know. And as always, shoot holes into my bullish thesis.

All the best,
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