Azure Healthcare Revisited

I thought I would take a few moments to share my thoughts on Azure Healthcare and the rationale behind my recent investment in the business. I have purchased just over 1m shares during Sep 2017 and continue to accumulate shares in the Company, with the view to holding this as a mid-term investment.

The last time I held AZV equities was in 2014 and I divested my shareholding ahead of the re-structuring process – whilst this was an essential step in turning the Company around, however it suppressed financial performance and placed immense strain on the working capital of the business (which eventually manifested itself in the form of a Capital Raise) and placed immense pressure on the ALC equity price.
If you are new to the stock, it would be worthwhile to read my old post At the time of the post, the stock was trading at 47 cents and I placed a fair market value on the stock between 16-18c.

A copy of the post is available here: https://hotcopper.com.au/threads/ann-2014-results-announcement.2342438/page-30?post_id=13933283#.WbjbgUm6yGQ

My estimate was that the stock would decline from 47 cents to between 16-18c, which it did over the following 24 months.
Today, I am suggesting that the equity should be trading in the range of 20 to 22 cents in 12 months.

Now that the re-structuring process is primarily complete, it is my assertion that the business will begin to grow its revenues and sustain profitability.

This is tricky to pick – if one invests too early in a restructuring process, then revenue, profitability and risk tolerance all come under pressure, whereas if one invests to late in the process, then the share price runs away and the ratio’s no longer make commercial sense.
I believe that were AZV is today, represents a good risk/reward ratio.

Global Market
According to Markets and Markets, the global nurse call systems market is expected to reach $USD1.75b by 2021 from $USD1.12b in 2016, at a CAGR of 9.3% from 2016 to 2021. Aging population and rising prevalence of chronic diseases, new product launches, technological advancements, and increasing healthcare expenditure are some major factors driving the growth of the nurse call systems market.  In disclosure, I was engaged by a leading research company to comment on the nurse call market as an 'expert' in this segment.

My interpretation of this report, is that this represents the retail, fully installed value of nursecall systems – the wholesale value of the market is likely to be 1/3 of this, but still around $USD373m ($AUD463m) mark in 2016 and projected to grow to $AUD723m by 2021.
Austco maintains an extensive network of partners and resellers, spanning over 60 countries, and providing support for over 4,500 sites globally, making if the fifth largest player worldwide in the nursecall segment. I believe that the Company makes a logical acquisition target in this space.

Peer Group Comparison
On Feb 7, 2017, AMTEK announced that it acquired Azure Healthcare's largest competitor, Rauland-Borg (who produce the Responder V product that competes directly with Tacera) for $USD370m ($340m Upfront plus a $30m Contingent Payment).  In CY16, Rauland-Borg reported revenues of $USD160m, representing a transaction value of 2.3125x multiple on revenues. It is worth noting that approximately 50% of Rauland-Borg’s Revenues came from Nursecall Solutions, whereas the balance is from the Education Market. This indicates that Rauland-Borg generated approximately $USD80m in nursecall sales ($AUD99.20m), approximately 3.0x Azure Healthcare Revenues in this space.

Azure Healthcare’s second largest Competitor, Ascom, reported Half Year Revenues of CHF143.2m, implying full year revenues of CHF286.40m ($AUD372m) with a Half Year EBITDA of CHF13.90m, implying a full year EBITDA of CHF27.80 (AUD36.14m). The Company presently has a market capitalisation of CHF705.60 ($AUD917m). This data highlights that it is trading at 2.47x Revenues / 25x EBITDA. It is worth noting that 60% of Ascom Revenues come from Healthcare and from three revenues streams: Nursecall, Clinical Middleware and Wireless Telephony. I would estimate that the nursecall division represents approximately 55% of the Revenues from the Healthcare division (i.e 33% of the groups total revenues), which would indicate $AUD123m in nursecall sales, approximately 3.6x Azure Healthcare Revenues in this space.

The above would indicate that arm’s length valuations in this space are presently trading in the 2.31x to 2.47x Revenues range. Historically, most nursecall businesses would trade in the broad range of 0.80x to 1.20x Revenues. However, this trend began to move upwards when Hills Healthcare acquired Questek and Merlon, at considerably higher multiples, however I wold suggest that 2x Revenues would be reasonable expectation – assuming a business was operating efficiently and effectively.

Azure Healthcare Financial Analysis
Whilst Azure Health revenues decrease from $AUD31.57m to $AUD28.92m, one needs to allow for the divestment of the Secure Accommodation Product Suite (CellGuard), which, whilst the figures have not been disclosed, judging by the transaction size, would likely to be around $AUD1.50m in Revenues. The balance of the drop in revenues is likely a result of timing issues associated with the relocating of the manufacturing from Australia to the United States and a rationalisation of the Company’s product suites.

I was at the HIMSS Conference (Health Information Management Society) in Orlando earlier in the year – the largest Health IT conference in the world and had the opportunity to see Tacera Pulse first hand. The platform is a quantum leap from the prior incarnation of the software and truly is a force to be reckoned with in the space.

Conclusion
I note that second half revenues were $AUD16.08 million versus the first half revenue of $AUD13.11 million, which would indicate that the Company is on track to generate revenues of $32m to $34m, with an EBITDA in the range of $1.10m to $1.25m.

With the recent acquisitions within the space and discounting for the difficulties that the Company has experienced, I would expect a fair multiple to be 1.50x Revenues, which implies a projected market capitalisation of between $AUD48m and $AUD51m. With 232,712,827 shares on issue, this implies a target price of between 20.63c and 21.92c.

At the current stock price of 7.00c, the Company has a market capitalisation of $AUD16.29m and is trading at .5x Revenues, which is well below its peer group.

I also note that Clayton Astles, an individual who I hold in very high regard, purchased 663,735 shares for $53,696, representing a cost basis of 8.09c per share – which is a great confidence boost for me and was the tipping point in my belief that this signified the completion of the restructuring process.