Protech Home Medical (OTCQX:PTQQF) is a healthcare services company that specializes in improving the home management of chronic illness through telehealth systems and streamlined, automated distribution, making life easier for the patient and physician. I was introduced to PTQQF for the first time at the recent LD 500 Investor Conference. My interest in meeting with PTQQF stemmed from my prior year meeting with InfuSystem (NYSEMKT:INFU); my subsequent successful investing in INFU, as outlined in my articles here, here, and here; and my thought that perhaps PTQQF would provide similar upside to INFU.
After hearing from PTQQF at LD 500 and researching the company further, I am confident that PTQQF will be a winning investment. In fact, I believe shares could conceivably explode by 200-450% in the next 3-5 years! Currently, PTQQF, a company growing both organically and via acquisition, is currently valued relatively poorly compared to its peers, even with management guiding to double revenue. Moreover, PTQQF, while well-covered in Canada, just recently obtained a U.S. OTC listing. By early 2021, they will likely be uplisted to the NASDAQ. Simply put, PTQQF has several tailwinds that could help it triple the current share price. Small-cap investors should consider adding PTQQF to breathe life into their portfolios.
PTQQF is currently a $100M revenue company, with 42 regional locations. PTQQF’s order life cycle begins with their in-house field sales team and ends with successful collections by their revenue cycle team. PTQQF’s ordering platform integrates all facets of the ordering process to help ensure patient satisfaction.
PTQQF offers equipment and supplies to assist customers with mobility, respiratory, and sleep-aid products. 68% of the company’s revenues are recurring from the rental of medical devices. The other 32% comprises disposable supplies and certain other pieces of the medical equipment.
PTQQF expects 4-5% annual organic revenue growth in the near future, with much of this coming simply from an aging population. Additional demand for its products and services will come from the US population continuing to be less healthy, with rising rates of obesity, diabetes, and other issues that often then lead to the need for respiratory products. Furthermore, as PTQQF enters new markets – often from what originated as an acquisition – they can leverage their network to expand the reach of the company they acquired.
Growth Through Acquisition
While PTQQF’s expected organic growth is fairly modest, their management brings extensive experience in healthcare management and acquisitions, with over $500M in total transactions. PTQQF’s proven and winning strategy can be seen in their investor presentation page below:
Source: PTQQF Investor Presentation
PTQQF’s formula is brilliant on many levels. First, PTQQF focuses on regional expansion to centralize shipping. Second, PTQQF’s acquisition criteria shows they are not interested in “biting off more than they can chew.” Staying in the relatively small realm of $5-20M revenue companies allows them to more easily integrate the acquired company/personnel. Third, PTQQF can decrease cost of goods sold by leveraging its increased purchasing volume. And fourth, PTQQF can expand the acquired companies’ previous margins by integrating PTQQF’s existing technology.
PTQQF grows acquired companies organically through its technological innovation in tele-health. PTQQF’s approach to tele-health helps to remove friction points and to deliver an improved service offering to the patient. This helps PTQQF differentiate from competitors to become the reliable, singular choice for regional hospitals and physicians.
As it stands now, PTQQF fits between the classifications of a national organization and a boutique, or smaller provider. In many ways, PTQQF can offer a happy medium. PTQQF is large enough to leverage its scale, but not so large that they cannot provide more customized services to regional providers. National organizations, of course, struggle with that better, more individualized service, while boutique organizations cannot leverage scale. Although, in some ways, PTQQF is becoming more of a national organization, I think they are actually better categorized as a multi-regional organization. As such, they have several different regions where they are becoming leaders, allowing them to leverage their scale, while not truly being a national provider in all 48 contiguous states.
Again, this formula for PTQQF has been proven as they have, to date, integrated 18 acquired businesses and increased those EBITDA margins, as noted in the lower right corner of the investor presentation slide above. On the next page of that presentation, the company notes it plans to increase revenue by at least 25% within the next two years at 20-25% EBITDA margins, while doubling current revenue (to $200M annually) within 3-5 years on 25% EBITDA margins.
Inflection Point for EBITDA Margins
Speaking of margins, I believe PTQQF has now reached an inflection point with EBITDA margins. In their 3Q2020, EBITDA margins were 21.4%, compared to 18.7% in the prior year period. As noted above from their investor presentation, PTQQF expects EBITDA margins to increase to 23-25% on the next $15-20M or revenue – a mark they will likely achieve within 12-18 months.
Furthermore, PTQQF’s investor presentation slide outlines their goal of reaching $200M of revenue and 25% EBITDA margins in three to five years.
Source: PTQQF Investor Presentation
I sense management strongly believes they can reach that goal and do it in less than 3 years. Both the expected growth in revenue and the expansion of EBITDA margins are key to my valuation of PTQQF, which I will discuss further below in the Valuation section and are why I believe the company is currently an attractive investment.
Investor Presence in the US
The LD 500 in early September 2020 was the first US investor conference attended by PTQQF. Although they are covered by six analysts in Canada, PTQQF is “below the radar” in the US. They intend to ramp up their presence with US investors in late 2020 and beyond, and to that end, they presented on October 14 at MicroCap Rodeo Best Ideas Bowl.
In addition to an increasing presence at US investor conferences, PTQQF plans to uplist to the NASDAQ exchange. I am told by people familiar with the industry that such an uplisting is likely to occur in early 2021. A move to NASDAQ will help increase their liquidity, as well as their exposure to institutions, many of whom cannot purchase OTC stocks. In my Valuation section below, I will note one other possible benefit of this uplisting, especially if it occurs in early 2021.
I believe PTQQF is currently attractively valued for multiple reasons: (1) EBITDA valuation multiples are low compared to peers; (2) the company has guided for robust revenue growth; (3) the company has guided for strong EBITDA margin expansion; (4) PTQQF’s increased investor presence in the US and eventual uplisting to NASDAQ should provide a nice tailwind to move shares upward. I will now deal with each of these items in more detail below.
PTQQF currently trades at a relatively modest ~8x trailing EBITDA. For comparison, its peers tend to trade for closer to ~15x trailing EBITDA. On a forward EBITDA basis, PTQQF is closer to 6.5x EBITDA, while peers trade near 12x, as highlighted in PTQQF’s investor presentation slide below. For the sake of argument, if PTQQF were to simply match their peers on a forward EBITDA multiple basis, the stock could nearly double alone on that.
Source: PTQQF Investor Presentation
Presumably, there is a reason PTQQF trades lower. One argument I have heard is that most of PTQQF’s growth is based on acquisitions and is, therefore, not organic. That is certainly a true statement, but given PTQQF’s historic success of acquiring and integrating companies, I believe that argument is weak. PTQQF continues to produce money from those acquired businesses, while expanding their margins, increasing the business’s value.
Another reason for this relative valuation gap is PTQQF’s lack of presence among US investors and institutions, something I will address further below. In the meantime, all of my other arguments for PTQQF being undervalued will assume that their EBITDA valuation multiple stays roughly the same. Even given that assumption, PTQQF is likely being undervalued.
In the next three to five years – and, again, I believe it will be closer to three – PTQQF expects to double their revenue. For the past ten quarters, PTQQF has been on or ahead of schedule with respect to their targets. With that in mind, I think PTQQF can double revenue within three years. Holding all margins even – a conservative assumption, given what I have discussed above and will re-hash below – PTQQF EBITDA numbers will double right along with revenue. At that rate, PTQQF shares should double within three years, simply based on the increase in revenue and the absolute increase in EBITDA dollars.
However, as stated, EBITDA margins are expected to expand, so our assessment of PTQQF doubling during that time leans towards conservatism.
In Q32020, PTQQF boasted 21.4% margins. Granted, there is some seasonality to their margins, historically, so we cannot assume 21.4% margins immediately going forward. However, speaking with industry contacts, they believe PTQQF margins should be in the 20.5% range over the next calendar year (i.e. Q42020 – Q32021), which would lead to $20.5M in EBITDA. That alone would lead to a valuation 25% higher than current prices, using the 8x trailing EBITDA valuation multiple.
However, the 20.5% run rate is the current margin rate for PTQQF. They expect that to expand moving forward, reaching as high as 23% over the next year or so, as revenue also expands to $125M in revenue. With that in mind, in a year from now, EBITDA could reach $28.75M ($125M revenue * 23% EBITDA margin). Using the 8x trailing EBITDA valuation, PTQQF should be valued in one year at a roughly 75% premium to today’s prices.
Looking three years down the line, with revenue at roughly $200M and EBITDA margins at 25%, PTQQF should see EBITDA around $50M. At the trailing 8x EBITDA multiple, shares would be worth 200% of current prices, a triple in three years. Granted, the company has risks, which will be discussed below, but they also have been successful in executing their plan and a history of success with their strategic acquisitions.
Again, keep in mind that my calculation of PTQQF’s possibility to triple did not include bringing their trailing valuation into line with peers, who trade at roughly a 15x trailing EBITDA. If PTQQF could close that valuation multiple gap, shares would have increased nearly 470% from current levels. Obviously, there is quite a range between an increase of 200% and 470%, but as a shareholder, I would be very pleased with any of those returns!
Increased Investor Relations in the US
I have primarily included PTQQF’s increase focus on US investors in this valuation section because I believe that focus could help close the valuation multiple gap. The possibility certainly exists that PTQQF receives a lower multiple, at least in part, because US investors are simply unaware of the company. Most US investors and institutions tend to focus on names on the US exchange, and even more specifically on companies that make presentations at US conferences for both institutions and retail investors.
While a focus on increasing awareness in the US alone is not highly valuable, where it could benefit PTQQF is in a possible EBITDA margin valuation expansion. As noted above, if PTQQF could close the gap on its peers’ valuation, shares could nearly double on that aspect alone.
Uplisting to the NASDAQ
Somewhat related to PTQQF’s recent focus on US investors is their stated intent to uplist to the NASDAQ exchange. I’m told by industry sources that PTQQF aims to finalize their NASDAQ listing in early 2021. In addition to similar benefits I mentioned in the sub-section immediately above, an uplisting to the NASDAQ could create another interesting scenario.
Specifically, the possibility exists that PTQQF, upon NASDAQ listing, would be added in summer 2021 to the Russell 2000 (IWM) index. For many years, astute investors benefitted from this tailwind and would buy shares of companies they expected to be added. As the secret got out, many investors now use the possible IWM addition (or subtraction) as an arbitrage opportunity. Namely, investors will scan for companies in December/January that they believe will be added to or subtracted from the IWM. Those companies they believe will be added are bought early, so that when they are later added to the index, investors benefit from institution buying demand created by their requirement to add those shares to track the IWM performance.
With respect to PTQQF, they will most likely be valued below the summer 2021 IWM cutoff, meaning they would NOT be added to the index in summer 2021. However, the possibility exists, especially given their recent focus on US investors, and their potential uplisting to the NASDAQ, that PTQQF could “sneak in” to the IWM. The reason I say they could “sneak in” is because of this scenario: (1) PTQQF is currently well below the valuation needed to be added to IWM, but if they close their valuation multiple gap, they could surpass that valuation; (2) PTQQF is currently ineligible for IWM because they are traded in the US only as an OTC/foreign-listed stock; they may remedy that by early 2021; (3) because of #1 and #2, arbitrage investors may completely miss PTQQF as they screen for likely IWM additions. If all three of these situations happen, there could be a very significant, one-time rush to purchase shares of PTQQF once IWM releases its list of expected additions to institutions.
Again, the situation outlined would be a “perfect storm” for investors. Regardless, PTQQF seems to be undervalued on a stand-alone basis, and if they are not added to IWM, they will more likely be added in 2022, and will receive the arbitrage and institutional buying tailwind in early 2022.
I believe PTQQF is a fairly safe investment, especially for the small cap space. They have a history of decent performance and successful, accretive acquisitions in an industry that is currently growing significantly. Still, investors should consider various risks associated with PTQQF.
The first risk is that PTQQF could make a bad acquisition. Not all M&A is successful, and purchasing the wrong company can lead to integration and cultural fit problems. While PTQQF has not experienced this problem as of yet, it remains a risk. There is also the possibility that their 18 past successful mergers will give the company a false sense of security in making acquisitions, and they could pull the trigger on one that would not make a good fit. Personally, in talking with management and seeing their clear strategy outlined, I think this risk is minimal. I believe management clearly understands this risk and is disciplined to only find good fits for them to acquire.
Related to this risk, management could also become more aggressive in terms of the size of company they acquire. The larger the company, the more likely it is that management could have problems with integration. Again, I believe this risk is minimal as management seems laser-focused on what they believe can be successful targets, none of which exceed $20M in annual revenue. In other words, any company they acquire would be no more than one-fifth PTQQF’s current size.
The final risk I wish to mention is the risk of further dilution. The reason for this dilution most certainly would be to make additional, currently unplanned acquisitions. The company recently raised $31M+ in a late June offering. I am confident the company will not make another offering in the near future as I believe this offering gives them plenty of cash. While I normally am not a fan of warrants attached to the offering, PTQQF structured this most recent deal with a half-warrant attached to the offering at $1.60/share (the offering price was $1.15/share).
The good thing about the warrants is that they would provide, if exercised, around $20M in additional funding to PTQQF, which is why I believe they will not soon need to make another offering for acquisitions. In any case, given PTQQF’s past success with acquisitions and expanding the acquired company’s EBITDA margins, perhaps future offerings would be bullish in nature.
PTQQF currently offers small cap investors a compelling investment thesis and risk/reward scenario. The company operates in a growing space and is new to the US investment scene, which will likely see them attract new investors. This should help PTQQF close the valuation multiple gap between its peers, which alone could possibly lead to a significant bump in PTQQF’s price. Regardless, given management’s growth and margin expansion plans, I believe it is possible that PTQQF could triple in 3-5 years, even without closing that valuation gap. Combining the two – both closing the valuation gap and growing the business and margins – could result in returns well in excess of 400% over that same time period. While investors should consider the risks associated with the company, specifically, and with small caps, generally, I believe PTQQF shares could breathe life into small-cap investor portfolios.
Disclosure: I am/we are long PTQQF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.