Originally posted by jg123456
hi MarsC
good post (as usual). I was underwhelmed with the result too, albeit for different reasons. The thing I was struck by was the sizeable contribution from the acquired practices, and the implied weak revenue performance from the existing practices (ie, those owned from before FY17). In particular, I subtract the revenue contribution from the acquired businesses from the total revenue for FY18 and compare this to FY17.
SO excluding the contribution from the practices acquired in FY18 (Gladstone, Maleny and Roma, Ingham and Buderim), like for like revenues were flat/up fractionally. BUT, and this is a big BUT: they acquired two large practices at the end of FY17 which did not contribute to FY17 revenues but did contribute to FY18. I.e, Chatswood and Bathurst. From the letter: "[Chatswood and Bathurst] had no effect on our 2017 operating results but were included for all of the 2018 year and made solid contributions to revenue and profit". Clearly if they too were backed out of FY18 results to enable a real apples-for-apples comparison between FY18 and FY18 then pure organic growth was significantly negative in FY18 from the core estate.
Two separate points I picked from today's result which also suggest poor organic growth:
- note 18: when testing for goodwill ONT has significantly reduced the assumed growth rate in revenues. "Future cash flows are projected over a five year period and use an implied annual growth rate of 5.3% (2017: 10%)". Ie, basically they have halved the assumed five year growth rate from the practices from 10% to 5%. Big reduction! 10% annual growth was heroic frankly given their recent rates of growth, IMHO.
- note 12: Membership and treatment plan receivables have significantly reduced. Last year they were 835K, this year $545k. Now receivables are often volatile (falling significantly if these is a high level of payments for some reason - day of the week effect etc) , but I would have thought these receivables are more stable. As the notes state "Membership and treatment plan revenue is recognised on an accrual basis, whereby revenue is recognised when the service is rendered". the reduction in these receivables may suggest a significant reduction in the popularity of these plans. Similarly, there is a big reduction in "unearned revenue" from $862k to $592k. Unearned income is where they have received cash under the membership plan, but have not yet performed the service yet so can't recognise the revenue. Again, a big reduction. (All of this may be evidence of your observation about the tough economic climate in Townsville - or perhaps a wider issue about the poor performance of some ONT practices).
There are a number of listed players in the sector (ONT, PSQ, SIL, and ABA.nz), and I have a smaller relative holding in ONT as ONT just ain't delivering for mine. GLAH
Hi
@jg123456
Thanks for your comments. I like posts of a non-cheer-squad variety, especially in businesses that I have a stake in (and while we wait for our regular friendly prompt from
@travelightor).
You are spot on with regards to your comments about "like-for-like" revenues. And you are absolutely right, two key things need to be done, firstly the current year revenues need to have acquired revenues stripped out,
and the prior year revenues need to be beefed up by annualising last years acquired revenues. Without making
both of these adjustments, things will look much better than they should.
I had actually been monitoring this sort of "like-for-like" trend. It's just an estimate, as reported prior year acquire revenues do not always have all required information (eg granularity of revenue pertaining to each specific acquisition). However, as is usually the case, precision is not required in order to gain an understanding of the trend.
But there was an error in my method. You see I like to think in terms of Over The Counter (OTC) revenues, as I believe these tell a more representative story than do statutory revenues (for this business). As such, all the numbers, including margins and charts, on my spreadsheet, are very OTC revenue centric. The problem of course is that the acquired revenues (in the
business combinations notes) are all statutory (presumably).
I was inadvertently adjusting annual OTC revenues, for the acquired statutory revenues. The statutory revenues are of course substantially smaller in magnitude than the OTC numbers. This meant that my estimated impact of the acquired revenues was less than it should have been. Very much less. And so whilst my estimates revealed a trend of negative like-for-like growth - it did not seem alarming to me. In short,I was
at this stage willing to live with this "leakage" on the basis that I felt there were other cyclical headwinds at play (in practice acquisition hurdles, and in operating margins of existing practices).
Having corrected my numbers, and seen the impact, I am now far less comfortable. So all in all, there are just too many questions for a business selling at current multiples. So I am out.
